Extended warranties may be unnecessary but offer peace of mind: experts

MONTREAL -- Sears Canada's decision to close down and stop honouring extended warranties has highlighted the risk for consumers seeking peace of mind.

Charene Juraski, a real estate agent in Maple Ridge, B.C., said she was pressured by salespeople to buy the protection agreement even after she questioned what happens if Sears folds.

Fearing the retailer's demise, she returned a fridge and stove for which she paid almost $700 for extra protection.

"I'm so glad now that I did. I felt really bad about it because I really wanted Sears to make it," she said in an interview.

The troubled retailer, which started a liquidation process last month, said it won't honour extended warranties and will only issue full refunds for protection agreements purchased between Sept. 18 and Oct. 18. The company has said most merchandise it sells comes with a one-year manufacturer's warranty, which is available to customers directly from the manufacturers.

The experience of many distressed Sears policyholders should be a wake-up call for Canadians and could affect purchases heading into the busy Christmas shopping season, said Kerry K. Taylor, author of the money blog Squawkfox.com.

"If you know someone who got burned by an extended warranty ... you're going to be very wary about going into that product purchase."

For retailers, extended warranties prove extremely profitable, allowing them to subsidize consumers who don't make the commitment., said Pranav Jindal, a University of North Carolina assistant marketing professor who authored a study on extended warranties.

Whereas retailers can earn 15- to 25-per cent profit on the sale of an appliance, the margin for extended warranties can run at 250- to 300-per cent, he said.

Extended warranties are popular with risk-averse consumers but the extra cost may be totally unnecessary, said David Soberman, a marketing professor at the Rotman School of Management at the University of Toronto.

"From a purely financial point of view they're not a good idea, but what we do is we buy many things in life for peace of mind," he said.

Uncertainty is such a big issue for some consumers that they're willing to fork over hundreds or thousands of dollars at the checkout, often without researching the fine print in the insurance policy, he said.

What started as a service offered decades ago when people owned just a few appliances has now become an important source of revenue for many retailers.

American consumers spent about US$17 billion on vehicle service contracts last year and roughly US$23 billion on protection plans for appliances, electronics, computers and mobile phones, says the trade publication Warranty Week.

Canadians are estimated to spend $3.5 billion to $4 billion a year on extended warranties, according to Michael Bailey of Superior Warranty Consulting Services in Vancouver.

Warranties come with a hefty price, estimated to range between 15 and 40 per cent of the price of the product itself.

Consumer Reports says extended warranties are not worth the cost.

"Chances are that what you spend will be money down the drain," the U.S. publication wrote in a 2016 report.

It said many products these days are highly reliable and unlikely to need repairs before being replaced.

Instead, it suggests consumers self-insure by setting aside some money monthly with each purchase to cover future repair or replacement costs.

Consumer Reports said a manufacturer's warranty offers protection in the first year of ownership and many credit cards extend that time when the item is charged.

Online videos can also offer tips that allow consumers to make the repairs themselves.

Soberman said there is little need for an extended warranty for electronics, as any problems will likely surface quickly. Products such as washers, dryers and cars are better suited for warranties, as they have moving parts that will eventually wear or malfunction.