To Buy or Not to Buy, That is the Question (Maintenance Contracts)

BCR Wealth Strategies |

When buying almost any appliance the salesperson asks if you want to “protect your investment” with a maintenance contract.  Even Amazon offers maintenance contracts on many of its offerings.  On TV it seems I daily see an ad for a maintenance contract on automobiles.  When purchasing flight tickets I’m always offered trip insurance.  And on and on…

Does purchasing these contracts make sense? I think not.  Here’s why:

Conventional thinking would probably go like this:  Auto repair (or computer repair, or air fare tickets or…) cost a lot of money.  If I “lost” that money it would “cost” me a whole lot, and the thought of that is very upsetting.  So, buying that insurance (or maintenance contract) will make me whole.  Makes sense! Or does it?

Let’s look at the logic of this. A friend of mine called just as I started to write this blog.  He told me that last year he and his wife went on a trip, bought the insurance, and it cost about 20% of the cost of the fare.  For this purchase to make sense their experience would have to be that they cancel about one in five trips they plan.  They told me that the actual number is much less than that, so essentially self-insuring would save them money.

I just called a company that sells auto maintenance insurance.  For a 2014 Honda Accord the monthly premium I was quoted was $129 (plus a $100 deductible per occurrence).  That may not sound like that much, but consider that’s $1,548 annually.  I ask myself “what is the likelihood that I’ll spend $1,548 on car maintenance this year?”.  Probably small.  Next year? Maybe, but by next year I’ll have spent more than $3,000 on the insurance.  (By the way, when I indicated I wasn’t interested, the monthly premium dropped to $99, but I had to buy right now.)

What about smaller things like cameras, computers and phones?  Again, ask yourself how many of these things have broken down in the last year or two.  Then ask what fraction of the things you own need maintenance each year.  You will likely decide that this kind of insurance or maintenance contract doesn’t make sense over the long term … or over the short term.  Remember, the cost of these contracts is significant with respect to the purchase price of the items, and by buying none of the contracts you are not only saving the cost of the contracts, you’re also saving the profit that the company offering the insurance is making.