Tuesday, May 28, 2013

Should you consider an extended warranty on your new cell phone?

It’s no secret that extended warranties are huge moneymakers for stores. For years, publications like Consumer Reports have railed against consumers buying these often overpriced insurance policies, but still, many thousands of consumers continue to feed into this frenzy. Today, the biggest rage in extended warranties is available on cell phones and smart phones, and it’s easy to see why. While you might get a great phone at a great deal when you sign the contract, which typically runs for two years these days, the actual purchase price of that phone can run as high as $500 or more for some of the more feature-laden and popular phones, but they come with a caveat. The manufacturer’s warranty doesn’t really cover the types of damage that a phone will quickly (and often easily) come into contact with on a daily basis, such as dropping your phone into a toilet or sink, theft, or other damage.

This is what has made these extended warranties so attractive to today’s consumers. The purchased warranty may cover things such as incidental damage, loss or even theft over the course of the warranty period, but is it really worth it? There are plenty of consumer advocates out there who say no, it really isn’t. The reason for this is one that is easy to see when you begin to understand how fear marketing works. 

Fear marketing is big in insurance, but it also has roots in a number of other industries, and I’m honestly not making it up. Fear marketing seeks to show a consumer what their life might be like without a certain product. It generally doesn’t matter just how often said tragedy might occur, just that it might happen is typically enough. That shiny new cell phone in your pocket is a prime target of fear marketing, as well. After all, you want to be protected if someone steals your iPhone, right? Sure you do! In actual point of fact, Apple products may be the only ones out today in which an extended warranty makes sense, but that’s mostly because of the prevalence of theft of these fancy phones. That doesn’t mean that you’re going to get a brand spanking new phone just because some punk on the street snatched it from you while you were wishing your grandma a happy birthday, though! 

The problem is that these warranties don’t lay all the facts out on the line at the start. Sure, a salesperson has to disclose everything you ask about the product, but if you don’t ask, then they don’t necessarily have to tell. For instance, did you know that there’s usually a deductible that you have to pay if you use the insurance coverage? Also, you won’t get a brand-new phone if something happens to your old phone. Usually, you get a reconditioned phone that isn’t worth as much as your original phone. Let’s say that you buy a fancy new smartphone, and opt for the insurance because it’s “only” $10 per month. The phone’s new cost is $499, but a reconditioned one can be had for $350. You’re under the contract for two years, which means you’ll pay $240 for the warranty coverage, and let’s say about 10% of the value of the phone as a deductible, (that’s the new value, mind you) at $50, and let’s also say you pay $50 out of pocket for the phone. That means all told, assuming that you lose the phone six weeks before your contract’s up again, you’re paying an approximate total of $340. Now, say it gets stolen, and you have to go to the cellular store for your new phone...

Hold up. That’s not how it works. First, you have to submit a claim. Then, they’ll send you a replacement phone (that’s the reconditioned one) in the mail, and it may get to you in a few days, and that’s after your check for the deductible clears. See what I mean? 

Here’s a better option: Look into your homeowner’s insurance or renter’s insurance and ask your agent about having a rider attached to the policy. It’ll cost you a whole lot less out the door, depending on your deductible (which can usually be predetermined when you set up the policy) and it’ll cover all the same stuff that the store warranty will cover - just for a whole lot less.

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