Turn down extended warranties on electronics

Cost

Free. The price is that after the warranty runs out, if something needs repair, you pay yourself, though the odds of that are not high.

What you get

Extended warranties are usually priced at 10% to 50% of the item's original price. An industry estimate cited in the research says the average gross margin on extended warranties is 50% to 60%: out of every 100 CNY sold, 50 to 60 CNY is profit. That is about 18 times the gross margin of ordinary goods. In 2003, extended warranties made up only 3% to 4% of Best Buy's revenue but contributed more than 50% of its profit (United States, retail data from the 2000s). For an extended warranty priced far below this range, you can do the calculation yourself: warranty price ÷ the cost of one repair = the probability of a breakdown needed to break even. It is worth buying only if you judge the chance of at least one breakdown during the warranty years to be higher than this number. For example, for a 25 CNY extended warranty, assuming one repair costs 300 CNY, the chance of at least one breakdown must exceed about 8% to break even. The 300 CNY here is only an example, not a statistic. Before calculating, first subtract the part already covered by national rules. The period under the national Three Guarantees rules (三包, repair, replacement and refund) runs from the day the invoice is issued: 1 year for the whole washing machine or refrigerator, and 3 years for the main parts. For washing machines, the main parts are the motor, timer, program controller and capacitor; for refrigerators, the compressor, thermostat and so on. Where an extended warranty overlaps the Three Guarantees period, you are paying for something you already had (national, since 1995)

Notes

The gross margin figure is an industry estimate that the paper cited from someone else (Business Week 2004), not something the paper measured itself. The method above applies to ordinary people who can afford one repair bill. People who earn a living with a single device and have no spare need to calculate separately. Phone screen-breakage insurance and the like also needs its own calculation: first estimate how often you drop your phone, then see whether the premium pays off. For a very cheap extended warranty, buying it will not lose you more than a few dozen CNY, but before buying check three things: when the coverage starts (if from the purchase date, the first years overlap the Three Guarantees), whether the merchant, the brand or a third-party company is the insurer, and whether home-visit fees and part-replacement fees are charged separately. Also check the manual and the warranty card first, because the warranty period the brand promises itself may be longer than the Three Guarantees period.

Evidence grade

B : Supported by research but without a precise number, or based on small or single studies.

Sources

1. Chen T, Kalra A, Sun B (2009). Why Do Consumers Buy Extended Service Contracts? Journal of Consumer Research 36(4):611-623. https://doi.org/10.1086/605298
2. 国家经贸委等 (1995). 部分商品修理更换退货责任规定（国经贸〔1995〕458 号，第八条三包有效期自开具发票之日起计算；附件《实施三包的部分商品目录（第一批）》洗衣机、家用电冰箱整机 1 年、主要部件 3 年）. 国家市场监督管理总局行政规范性文件. https://www.samr.gov.cn/zw/zfxxgk/zc/xzgfxwj/art/2019/art_f943e66de125437d92df701e1654c47c.html

Translated from the Chinese original. Original book, section 5, tip 11. This section is about money and spending. It is general information, not financial or investment advice. Content may be out of date and rules differ by place. When you actually deal with an agency, a doctor or a court, follow what local officials, doctors and lawyers tell you. Disclaimer