This article was written by Kirk and has been published in Escapees Magazine, in 2005 and again in the Jan./Feb., 2010 issue. For information on Escapees RV Club, visit their site.
Extended Warranties are the subject of heated debate in any gathering of RVers. Most have an opinion, but few understand them. Before you make the decision of what is best for you, it is important to understand what they are and what they do.
An extended warranty is not a warranty at all, nor is it a service contract. A warranty is a guarantee of performance by the manufacturer, but even extended warranties sold by the RV dealers are not from the manufacturer. A service contract takes care of day to day maintenance, but extended warranties don’t. They are really health insurance plans for RVs. They are backed by an insurance underwriter. Most plans are run by a company that contracts to administer extended warranties for a fee and if you call, seldom do you speak to an employee of the company who sold the plan or one who works for the underwriter.
Extended warranties work like health plans in most respects. Frequently there are two underwriters involved, one to pay small claims and another who pays only for catastrophic illness, or in our case catastrophic failures. Let’s look at how health insurance works.
Each member of the plan or policy holder pays into the plan a fixed amount which goes into a big pool. (Keep in mind that some of us have health insurance that is paid mostly by our employer and what we pay is between 10% & 50% of the actual cost of coverage.) From this money all claims are paid and all operating costs and profits must come. Obviously for the company to survive, the average customer must pay significantly more than the amount paid out to him. Why is this ever a good deal? For a healthy person it isn’t, if you only consider cost versus return. We pay for protection against the possibility of a major medical expense. Insurance underwriters call this “spreading risk.” They know that one person in every “X” number of policy holders will have claims that exceed their premiums. Using that average, adding cost of administration and profits, premiums are determined.
With an RV we have exactly the same situation. The underwriter knows from studies, the average cost of repairs for each year of life of any RV, adjusted by age (the same as health plans). They calculate what will be paid out per year on average, adjusting for administration expenses and profit margin, to determine price. That price is for a prepaid health policy on the RV. When you look at each RV individually, it will usually cost more for coverage than to pay out of pocket. Prices vary based upon the deductible and by levels of coverage, just as health insurance does. Like health plans, some extended warranties have limits of payment built into their contracts. Health plans with no payment limit cost significantly more, as do extended warranties. Cheap health plans do not pay much of a patient’s needs, and cheap extended warranties limit their risk by increasing the deductible and limiting things paid for. It is a business, nothing more. Many RV buyers, who would never consider getting the cheapest health insurance coverage, buy the cheapest extended warranty and are unhappy when a claim is rejected!
It is important to read, and understand the contracts of extended warranties. Recently there have come from the underwriters, contracts that list what is not paid for, called exclusionary policies, and stating that they will pay for all other repairs. The other choice is called inclusionary and lists what will be covered. Understanding is vital. Always insist upon taking a blank contract home to read and study before buying. Don’t sign if you can't study it first. When you shop, compare prices and coverage, and like health plans, consider what the deductible is and what you must do to get repairs covered. As you would with a health plan, learn how they pay for covered repairs. Last, check the company with both the Better Business Bureau and with AM Best or one of the financial rating companies. There are very few plans that are really a scam, but cheap plans must show a profit and to do that they limit payment. Since cost of administration is about the same for all plans, the value per dollar paid tends to be best toward the higher end of the market. It is important to note that they are sold by commissioned sales persons and the ethical standards of the seller are just as important as with a car or an RV. Most non-dealer agents are actually brokers.
Better plans cost more and price rises quickly with age of the RV. That is because plans do not pay for repairs covered by manufacturer’s warranty and major repairs become more common with age. Just as insurance companies charge more for older customers, an extended warranty will cost more for an older RV. At some point, most companies will not renew coverage on older RVs. Like any insurance, you can get a lower price with higher deductibles. Deductibles can range from as little as $25 to $1000, or more. Like health plans, some limit where customers can go for service and some have a maximum that they pay in the life of the contract. These are legitimate ways of limiting exposure and lowering cost. It is my observation that most happy customers of extended warranties bought the higher priced contracts, while the majority of unhappy customers have the lower priced ones. There are crooks in the extended warranty business, but most are not. It is true that the companies do pay large commissions to the F&I person at the dealerships, but few would be sold if they didn’t. It is also true that dealers find extended warranties to be very profitable since little expense is involved so return is high. Remember that in order for a company to be around to pay your claim if disaster strikes, they must be healthy and profitable.
Should you buy an extended warranty? The answer should be the same for any insurance question. The way businesses determine whether or not to insure assets is to ask, “If we do not insure and the worst happens can our finances survive the cost?” If that answer is yes, they do not buy insurance. This is the way to evaluate an extended warranty. Statistically, you will probably not recover the cost of coverage. Like insurance policies, the purpose is not to save money, but to protect you from financial disaster. For some, the need to replace an engine or transmission would mean that we could no longer afford to travel. If so, you should purchase a quality contract to protect your future.
Once you have concluded that you wish to buy an extended warranty on your RV, you need to evaluate the choices and choose which is best for your budget. As you shop, consider the costs associated with your RV. Clearly the financial risk is much higher for motor homes than it is for trailers of any kind, but with a trailer you need to apply that same principle to the tow truck. It may be that the sound choice is to cover only the tow truck, or to keep a larger deductible on one than on the other. A higher deductible has much the same effect as it does on house or car insurance so consider how much cash you keep on hand, making the deductible as high as your budget comfortably allows.
For us, we were buying the RV to go on the road fulltime and were retiring early without access to our IRA's or 401K. Replacement of the refrigerator or a transmission would have been a major disaster. We chose to buy a plan covering as much as possible because we had the money at the time of purchase with both still working. Down the road five years was financial speculation so we chose to pay as much as we could up front. For us, an extended warranty from one of the higher priced companies was the answer, allowing us to hit the road knowing that we would not have repairs to worry about. While all repairs were happily paid, we only collected about ½ of the original purchase price in its seven year term. Even so, we feel that we made the correct choice because we slept well knowing that major repairs would have been covered.
When our contract expired, we did renew it but with a much higher deductible because our financial future was no longer unknown. Today, we don’t have an extended warranty. Our RV is now 11 years old so the cost to renew would be much higher. We now have cash or accessible resources enough that we could pay for a new engine if need be. We have been on the road long enough that we know what our expenses are and that we have more than enough income to meet our needs. It is no longer a good business decision.
When we purchased our previous motor home, we did not buy an extended warranty for it. Since it was three years old the price was much higher, though it had low mileage and little use. When we bought it we were both working and it was not our home. If it broke I could take time getting it repaired and probably do most repairs myself. Even in the worst case, we would not be deprived of our home or our lifestyle.
To say that extended warranties are always a bad choice is as foolish as saying that they are always a good one. How many people do you know who have ever saved money by purchasing collision insurance for automobiles? If you add up premiums paid, then deduct your claims, you would probably be shocked to see what a poor return on investment insurance really is. For most people that is true of all insurance. We buy it for protection. The same should be true for an extended warranty.