How come no one just sells stuff anymore?
If you buy a new computer or DVD player, you can’t escape the salesperson’s lecture on why you should buy an extended warranty along with it. If you visit a bank, a travel agent or a car rental outlet, you can’t back away from the counter without getting a high-pressure sales pitch for add-on protection policies. Surely it’s only a matter of time before the disembodied voice at the Tim Hortons drive-through asks, “Would you like to add scalding insurance for 25 cents?”
Even before that day comes, the current profusion of insurance policies puts most of us in an awkward spot. We don’t know if we’re getting a deal or not. Is it really worth $25 to buy two more years of protection on your new coffee maker? An additional $50 to move up to the extended coverage level at the car rental agency? Fortunately, we’ve found the answers. Read on to find out whether you’re buying peace of mind or a piece of garbage.
The most pervasive kind of product insurance is the “protection plan” that retailers are quick to offer when you buy a television, a computer or other electronic gadgets. Often called extended warranties, these plans are technically not warranties at all, because they don’t come from the manufacturer. They’re service contracts, usually handled by a third party.
In most cases, you should give extended protection plans a cold shoulder. Just as a casino’s odds always favor the house, a service contract always favors the retailer. The retailer knows how likely your new gadget is to break down and how much it will cost to repair information you don’t have. Since you have no way of telling what’s reasonable, retailers set the prices of these contracts as high as they can. According to USA Today retailers make profits of up to 70% on extended warranties, compared with 10% on the actual product. Commissioned salespeople, motivated to “upsell,” have been known to mislead customers about what’s really covered.
Amaro Silva of the Better Business Bureau’s Winnipeg chapter says he hasn’t heard many complaints about extended warranties, but he doesn’t personally buy them. “I really don’t see the need,” he says. The manufacturer’s warranty is sufficient for inexpensive items and the cost of extending your protection is steep. Consider a $70 Motorola phone at Future Shop. Adding a three-year Product Service Plan will cost you an additional $15 more than 21% of the cost of the product itself. “Once you get beyond one or two years,” asks Silva, “why would you want to spend money for an additional warranty when, given the depreciated value of the item, you’re probably better off buying a new one?”
The same logic holds for items that rarely go on the fritz. Consumer Reports magazine found that only 9% of 25- to 27-inch TVs and just 7% of countertop microwaves needed repairs in their first five years. It makes little sense to buy extra protection for reliable items like this, especially when you consider the cost of the added protection. If you buy a 27-inch JVC television for $350 at Future Shop, you pay an additional $55 (that’s 16% of the product’s price) for two years of extended coverage. Make that $70 if you want in-home service.
Are protection plans ever worth the money? Consumer Reports generally shuns them, but acknowledges they may be good value for very expensive items prone to breakdown, such as laptop computers. Just make sure that the warranty doesn’t load unrealistic conditions on you. For instance, if you’re buying a large item like a treadmill or projection TV, you may want to look for a contract that includes in-home service to save you the task of having to move the thing if it breaks.
Car rental waivers
Who gets handed the bill if your rental car is damaged? You do, which is why the guy behind the counter will offer you a collision damage waiver for $10 to $20 a day. This isn’t an insurance policy; it simply means the rental agency agrees not to hold you liable for repair costs.
You can avoid paying waiver fees if your credit card is one of those that provide automatic coverage. But don’t just assume you’re all right call your card issuer to ask about the limits and conditions of the policy. Some plans cover accidents only if the cardholder is driving, not the cardholder’s spouse. Others require you to pay damages up front and then make a claim for reimbursement later.
Sally Praskey, editor of Insurance-Canada.ca and co-author of The Insurance Book, recommends that drivers consider adding coverage for non-owned vehicles when they buy or renew the policy on their own car. Usually called a 27 endorsement or something similar, this policy feature covers you when driving any car other than your own. “It’s usually a good way to go,” Praskey says, since the premium is only $25 to $50 a year much cheaper than paying the collision damage waiver at a rental agency if you rent for more than a couple of days a year.
The only downside to the 27 endorsement, Praskey warns, is that if you have an at-fault accident with the rental car, it will affect the premiums you pay on your auto insurance.
Trip cancellation insurance
If you’ve just spent thousands of dollars to book the vacation of your dreams, it may well make sense for you to spend a couple of hundred dollars more to ensure you won’t be throwing your investment away if you have to cancel. But you should still shop carefully.
It’s easy to pay for more insurance than you really need. Some hotels and resorts, for instance, allow you to cancel reservations with only a couple of days of notice or to re-book later for only a small fee. If that’s the case, buying insurance on your entire vacation becomes far less attractive. Travel agents often quote you a take-it-or-leave-it price to insure your whole trip, but that’s not your only option. After you book your trip, you can call a third-party insurer and pay a premium usually 5% to 7% of the cost to insure only the portion of your vacation that is non-refundable. For example, if you’re traveling in North America on a one-week trip, CIBC Travel Insurance offers $5,000 of cancellation coverage for just under $350.
Note that cancellation insurance doesn’t allow you to simply change your mind. “It’s amazing how many people think it does,” says Praskey, the insurance author. Policies usually cover only a death in the family or an illness or an accident that renders you unable to travel. Preexisting conditions are generally excluded, so don’t expect sympathy if your arthritis or diabetes acts up just before your big holiday. Keep in mind, too, that a touch of the runs or a minor injury doesn’t qualify. “You couldn’t cancel a ski vacation because you have a broken leg,” Praskey says. “As long you’re medically able to travel, then you’re on the hook for the cost.”
A few plans do cover cancellation because of specific nonmedical reasons, such as loss of employment, airline strikes and government or weather advisories that urge you to avoid your destination. Be sure you understand the fine print, as policies vary widely. And, as with extended warranties, don’t accept verbal reassurance from the salesperson read the policy or call the insurer directly with questions.
Ever worry that an accident or layoff might make it impossible for you to pay your credit card bills? “Balance insurance” covers the monthly payments on your debt if you run into these problems. The premium is determined as a percentage of your current balance and added to your bill. Typically you’re asked to pay just under 1% of your balance for a policy that covers you in the event of death, disability or job loss.
Don’t fall for it. “If there ever was a type of insurance where you could say ‘Don’t bother with it,’ this is probably it,” says Praskey. She points out that you’re usually covered for only the minimum monthly payment on your credit card, so you’ll continue to pay interest on the balance. “Generally, you’re going to lose money in the long run. You’re better off paying down your card balance rather than paying premiums.” If you’re really worried about making sure your debt won’t spin out of control in event of an accident, Praskey recommends you buy a comprehensive life, disability or critical illness policy.
Be particularly suspicious of balance insurance offered over the phone. Many telemarketers offering credit-card insurance are scam artists looking to get your credit card number.
If you’re a homeowner, chances are you’ve heard pitches from people who want to sign you up for protection plans covering your furnace and air conditioner. Policies cost about $140 to $220 a year for a typical forced-air gas furnace, and about 10% less for an air conditioner.
Make sure you know exactly what’s included. Most plans cover parts and labor, but only some include the costliest components, such as the heat exchanger. You probably don’t need any policy if your furnace is less than a decade old, but buying protection does begin to make sense when your equipment is nearing or past the 15-year mark. Martin Luymes, director of the Heating, Refrigeration and Air Conditioning Contractors of Canada (HRAC), strongly recommends you choose a plan that includes a yearly cleaning and checkup. These plans cost more, but the preventive maintenance will help your unit run more efficiently.
Before signing up for any plan, make sure you’ve compared it to the competition. Some private companies such as Direct Energy in Ontario and Alberta include their name and service number on your gas bill and can add their plans to your monthly payments. Many homeowners, says Luymes, automatically reach for their bill and call that number, mistakenly believing they’re dealing with the utility. In fact, these service companies are no different from other contractors that offer protection plans. Shop around using the Yellow Pages or a Web site such as HRAC’s.