Is an Extended Warranty Worth It?
Example: Warranty cost: 1800 $ · Coverage length: 4 yrs · Typical covered repair: 900 $ · Chance of a repair/yr: 25 % · Deductible per claim: 100 $ · If invested, return: 5 %/yr
| Net value of buying it | $-1,000 |
| Expected repairs it covers | $800 |
| What the warranty costs | $1,800 |
| Premium invested instead | $2,188 |
| Verdict (1=buy, 0=skip) | 0 |
Worked example
A $1,800 warranty over 4 years covering $900 repairs with a 25% annual repair chance covers roughly $800 of expected repairs after the deductible — less than the $1,800 price. Meanwhile, banking that $1,800 and investing it grows to about $2,200. The expected value says skip it and self-insure.
Frequently asked questions
Why do most extended warranties lose money?
Sellers price them to cover their costs plus profit, so the average buyer pays more than they get back. That is fine for the seller and bad for the typical buyer — the exception is when repair odds or repair costs are unusually high.
When is a warranty worth buying?
When a covered failure is both likely and expensive relative to the premium — common on complex EVs, luxury vehicles, or components with known reliability problems. Raise the repair probability or repair cost and watch the verdict flip.
What does “self-insuring” mean here?
It means declining the warranty and setting the premium aside yourself. If nothing breaks, you keep the money and its growth; if something does, you pay from that fund. Over many purchases, self-insuring usually wins.