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Are Service Plans and Home Warranties Worth the Cost?

Written by on Thursday, 07 August 2014 2:25 pm
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Extended warranties, or service plans, offer consumers longer terms of coverage on service, repair and replacement for their home's appliances than the standard out-of-the-box warranty from the manufacturer.

These warranties are highly profitable for retailers, as they deliver 50% profit, but they also run up the total cost of your washer, dryer, or or refrigerator by as much as $118, according to Consumer Reports.

Are service plans actually worth it? You can argue the benefits both ways.

In the fast-paced world of home electronics, future technology will far outclass today's products by the time the extended warranty expires. Digitaltrends.com states that household electronics have seen great improvements in product reliability, making the price of most extended warranties about the same as a repair bill. The same is true with most appliances today too.

Consumer Reports data concludes that products "usually don't break during the two-to-three-year period after the manufacturer's warranty expires and the service plan is in effect." And if they do break, the repairs, on average cost only $16 more than the service plan. Most defects will reveal themselves within the first year of use, while the manufacturer's warranty is still good.

If you're tempted to buy a service plan, follow this rule -- the cost of the warranty should be no more than 10% of the purchase price. That said, extended warranties should be purchased for some items, including those that are difficult to repair or high-priced items that would be painful to replace.

Or you could buy a home warranty for about $500. Explains Amy Hoak, correspondent for MarketWatch, "A home warranty is a service contract that commonly covers the repair or replacement of your home's appliances and systems, including your heating and air conditioning systems."

No matter which appliance breaks, you make one call and the service plan call center dispatches the appropriate repairperson. The problem is that service providers pay for these leads, which means they make less money, so be prepared to be upsold to a "cleaning" or more expensive repairs.

In addition to the annual fee, you'll also pay a $60-$75 service fee when a contractor is dispatched to your home.

Home Warranties are ideal for rental properties and as incentives for homebuyers, and they come in handy when multiple appliances break down, saving an average repair bill of $840 or a replacement at an average of $1,200, says Hoak.

Ultimately the choice and risk are yours to assume. Extended warranties or home warranties can be worth the cost in terms of peace of mind, but only if it's for a product you don't intend to change for a few years.

And if you decide to skip the warranty, be prepared to shoulder the cost for assessment (service calls), repair (time in labor plus parts) and shipping.

Consumerreports.org says you shouldn't have to pay extra to get manufacturers or retailers to stand behind their products, but sometimes, you have to. If you have older products and systems, a home warranty may be your best bet.

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  About the author, Blanche Evans

2 comments

  • Comment Link Brian Luck Friday, 08 August 2014 1:42 pm posted by Brian Luck

    I have also been involved with these home warranty companies for over ten years; the jury is still out, as sometimes they work out great and other times clients hate them. I now use a company that allows the client to choose their own contractor and provides "coverage" during the listing period at no cost to the seller; there are limitations but still better than nothing.

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  • Comment Link Jean Rowe Friday, 08 August 2014 10:12 am posted by Jean Rowe

    I am a RE Broker who after years of promoting Home Warranties to buyers and sellers, had my eyes opened when I purchased a home last year. When the garbage disposal broke First Am replaced it with a piece of junk. The repair on my garage door cost me $175 because the service contractor said I needed to replace a part not covered and the final straw was the water heater which cost me $400 because all the connections needed to to be replaced. The contractor admitted that the $60 service fee I paid didnt cover his expenses and he needed to sell up grades to make it worth his while, The HW does protect the seller from lawsuits which were quite common before HW became the norm.

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