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Extended warranties for RVs

This article was written by forum member Kirk Wood and published in the Sept./Oct. 2004 issue of Escapees Magazine. The article is also published on Kirk's web site, and is reproduced here with the express permission of the author.

Extended Warranties are a subject of heated debate in any gathering of RVers. It is a subject that most have an opinion about, but few understand. To make the decision that will be best for you, it is important to understand what they are and what they are not.

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. And a service contract takes care of day to day maintenance, but extended warranties don't. These contracts are really health insurance plans for RVs. They are backed by an insurance underwriter. The underwriter may be several layers down, but they are there. 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 who works for the underwriter.

Extended warranties work just like health plans in most respects. Like health plans, there are often two underwriters involved, one to pay small claims and another who pays only for catastrophic illness, or in our case catastrophic failures. In both, there may be several layers of vendor between the customer and the underwriter. Let's look at how health insurance works.

Each member of the plan or each policy holder pays into the plan a fixed amount that is put 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 our 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 each policy holder. So why is this ever a good deal? For a healthy person it is not 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, rates are determined.

With your RV you 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 (which health plans do also). They then 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. The fact is that when you look at each RV individually, it will probably 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. Just as most health plans have a maximum that they will pay; extended warranties have limits built into their contracts. And as health plans with no payment limit cost significantly more, so do extended warranties. The point is, just as cheap health plans do not pay much of patient's needs, cheap extended warranties limit their risk by increasing the deductible and limiting what they pay for. It is just a business decision, nothing more. For some reason, 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!

The key is to read, and understand the contracts of extended warranties. Most list exactly what they pay for, and while it doesn't say what won't be paid, that is anything not listed. Recently there have come from the extended warranty underwriters, contracts that list what is not paid for, stating that they will pay for all other repairs. That choice is best in today's market. Understanding is vital. Always insist on taking a blank contract home to read and study before choosing. Don't sign if you can't take it home to study it. When you shop, you not only need to compare the price and coverage, but like health plans consider what the deductible is and what you must do to get repairs covered. Like health plans, see how they pay for covered repairs. There are very few plans that are really a scam, it is just that 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 will tend to be best toward the higher end of the market.

Better plans cost more and price rises quickly with the age of an RV. That is because plans do not pay for repairs covered by manufacturer's warranty and they know major repairs become more common with age. Like health 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 will limit where customers can go for service and some will have a maximum that they will pay in the life of the contract. These are legitimate ways of limiting exposure and lowering price. 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 may be SCAMers in the extended warranty business, but most are not. It is true that the companies do pay large commissions to the F&I person who sells it, but few would be sold if they didn't. It is also true that dealers find extended warranties to be very profitable, but that is because there is little expense involved so profit is high.

The question is should you buy an extended warranty? The answer is the same for all insurance questions. The way businesses determine whether or not to insure their 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. The fact is that statistically you will probably not recover the cost of coverage. In our case, we were buying the RV to go on the road fulltime and were retiring early without access to our IRA's or 401K. A 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 since we both were 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 since it allowed us to hit the road knowing that we would not have that issue to worry about. While all repairs not done by me have been happily paid, we don't really expect it to save money. When we purchased our previous motorhome, we did not buy an extended warranty, which was the right choice for that purchase. Reasoning was that since the motorhome 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.

To say that extended warranties are always a bad choice is as foolish as saying that they are always a good buy. How many people do you know that have ever saved money by purchasing collision insurance for automobiles? If you add up premiums paid and then deduct your claims, you would probably be shocked to see what a poor return on investment insurance really is. We buy it for protection. Extended warranties are no different.