In that case it sounds like the issue is not so much of buying an extended warranty but of buying the car in the first place. If your warranty came into effect at 60k miles then this means your car has had all of these problems under 100k. This to me means a very unreliable car. My Chrysler on the other hand was purchased at about 68k miles, is on its 3rd set of tires now with over 150k miles on the car. It has had about 1000 dollars of work, all elective. This to me is not great service, it is what I expect out of my cars.

 

^ Well I just see it as a given as my car is an 03.. First year that the G35 came out in. Its almost a rule of thumb that all first year models of new vehicles have the most issues.

 

Well that may have something to do with it as it is the same with my 300m which is a first year model. It does have more issues than the years following it, but then at 150k it is doing better than a first year Infiniti with less than 100k. It uses no oil between oil changes at 3-5 k intervals, the autostick transmission is still working fine with a couple of quirks it always has had, but it does have an issue that I think is going on with one front tire that is wearing at an accelerated rate compared to the others (the set does have close to 40k on it however). The ride is getting a little bit mushy as I think it needs new struts. It is on its third battery after the second one, an Ultima crapped out after a little over a year of service. It has had a timing chain replaced and a water pump (not needed but done at the same time, both scheduled. It is on its second set of brakes which are still not completely worn out (but getting close). It has had a suspension part replaced.

Total cost just over $1000 and out of service for a total of about 3 days. In comparison my 08 Infiniti has been out of service for over 16 days when it reached about 13k miles with just under one year of service. Jury is till out on its reliability.

But still as far as a warranty goes, so far in both cases it would not have paid to do so with either vehicle yet, just depends on how the Infiniti behaves after the factory one runs out.

My wife does have one for her Versa. Two reasons it has the CVT which I wanted since I like gadgets (but don't trust since my Honda Odyssey atv days, a pain but a kick) and for her piece of mind later on, but not really for economic reasons that I can justify.

 

Wow...under factory warranty! So all those failures happened before 30K miles?

 

Must be one nasty machine. Personally it sounds like it could have been condemed under some sort of provision of a lemon law as unsafe.

 

Well, it helps on their part that, if you buy a 7 year warranty when you buy the new car, you aren't even using the warranty for 3-6 years, depending on the factory warranty.

On the other hand, it wouldn't surprise me if there isn't a VERY large commission paid out. 30%+ or more wouldn't surprise me. This would help explain some of the discounted prices you see posted here for warranties.

And, yes, there can be years they make 10% on the money (minus commission). But there can be years it goes down 30%. Safe investments don't make 10% consistently.

I would think that, on average, they have to pay no more than 50% of the purchase price of the warranty out on payments to make money all along the chain. The individual person who gets a $3000 engine replacement comes out ahead. The larger number of people who get maybe $200 or $300 worth of coverage for $1000 get, at best, peace of mind.

My truck had $400 worth of saved money for $1200 purchase price. My current G35, for the $800+ I paid, saved me $500 nearly 2 years ago, and I'm having another repair made next week. So I'll be $200 ahead, which after interest, etc, is essentially a wash compared to paying for the repairs myself. Unless I have another problem in the next 11 months.

 

Well...if I decide to hold on to the policy and nothing goes wrong...I may just squirt a tube of JB Weld in with my oil...just to stick it to the man.

 

Maybe not consistently but probably on average. And yes a commission is probably paid although it is a little hard to nail that number down. For example an extended warranty sold through a credit union probably carries with a commision to the credit union. Then the loan (including the full price of the warranty) which is either to the credit union or as common recently goes to another party who pays a portion to the credit union carries its own markup. On average everyone makes money except the owner of the warranty.

Not to state there isn't a value, but more likely than not that value is on the order of 'peace of mind for piece of hind'.

 

I think that, over the last 10 years, you won't find too many "safe" investments that earned anywhere close to 10%. 10 years ago we were very near the top of a bubble. Some mutual funds purchased then are still well below what I paid.

Over a 1 or 2 year period, you can generally look back and see something that did 10% or better. Gold over the last couple years, for example. But over, say, the last 30 years gold is up under 30% nominal, or a big net loss when inflation is factored in.

I suspect that where investments made by insurance companies really make a big difference is in life insurance. You make 20 years of payments, 30 years, or longer. The payout, if you receive it, is larger than the payments. But that is also feasible because many times the payouts are never made. You drop the policy, for whatever reason (kids grow up, etc), so there isn't any payout whatsoever.

 

Of course, much of the payout on an extended warranty (for a new car) is delayed. My 7 year extended warranty is only exposed to powertrain problems for 1 year. So, they are responsible if a problem hasn't shown up during the previous 6 years. Possible, but if it had been something wrong from the factory, it probably would have shown up before. Now, with the mileage cap, they can be exposed if I had hardly driven the car the first 6 years, and then I start to drive it heavily the 7th year. Again, something they are risking.

Another way they can benefit is if, after 4 years, I trade the car in for another. I think you can get some type of refund, but I doubt it is a full refund of the purchase price (which would include commission). If it is prorated, then I would get back less than half, even though everything to this point would have been covered by the factory warranty.

Another factor that MAY also come into play is that the payouts may not be as much as it looks. If, out of pocket, a repair may have cost $600. With warranty, there is the $100 deductible, and maybe the warranty rate is lower, and the service department only gets $400 from the warranty company. You see $500 savings, the payout is $400.

 

Only if you include 2008 in a ten year period would you have done badly in the stock market, just under 10% if you averaged 1997-2007. Since 1926 you would average 12% which is why those that were rich before the big crash and held on to their investments became even richer afterwards. It is a matter of surviving through the bad times by not living on your investments. During my SS work history if I had invested just in the stock market I would have averaged about 12% in the stock market including investments of dividends. The real estate market is another one that would easily have gotten you greater than 10%. These are of course not year to year safe, but on average they will get you your return.

One of the worst places is a 401k plan during the years leading up to retirement. Safe during the years where contributions are the major source of growth but not so in the few years prior to retirement. For example in my final year I lost close to 25% with more to follow (which I could not stem due to available investments). One reason the 401 k is bad is that as you approach retirement your exposure to a bad year increases especially since your retirement may well be combined with a force layoff which we have recently seen the result of. A younger worker will pick up and leave and his exposure is less.

There is a way to actually make a fairly good return by simply borrowing against your 401k (if the plan allows) but you have to be disciplined to do so. You'll gain about 7% by doing so assuming you understand the market.

A year to year 'safe' investment will be about equal to simply spending your money based on inflation. During this year my investments have earned almost exactly 20% so far. It actually is a little bit more than this since I took out about 7% to live on. I believe next year this will drop to about half of this (about 10%).

 

Kind of proves my point. Making investments to cover a 7 year time frame is a crapshoot. I would have to see some evidence that car warranty insurance policies are assuming, and getting, over 10% annual returns to cover them.

And even 10 years apparently isn't long term. I was just looking around, and averages were generally given over 25 years. Which can vary from an average of 9% to 11%. But the variability from year to year can be very high.

It still seems more likely that investments made for insurance purposes are more likely to be more stable investments that earn, on average, less than this but are less likely to drop 50% in any given year. And just depend on pricing the policies such that the average payout over the life of the policy is less than what they are paid. Investments, etc, could then help cover costs of employees, profit, etc.

 

I believe with the exceptions of years like 2008 that you would find that 10 year periods generally yield the average. In the case of a car insurance it doesn't mean that the seller is going to invest that money for 7 years. The seller will be making investments for varying lengths of time on a rolling basis which may in fact be for expanding their own operations by funding within.

If you drop down to averages less than 10 years for 1997 - 2007 it will drop below the 9-10% mark for years 1999 through 2002 to 2007 (ie 1999-2007 = 4.81%) but 2003-2007 yields 13.11%. Insurance companies will not only play the stock market but also purchase long term annuities and so on to even out the yearly rate of returns. An annuity will typically pay you around 6%. A member of my family has an interesting account in that she takes none of the loses in return for only taking 80% of the gains.

If you live on your investments like a day trader you will almost always come out a loser. When you don't you will win on the long run. Take a 10 year period back from these years and watch what occurs to the 10 year average. For example 1992-2002 = 10.93%. Yep a year like 2008 will mess with you but only if you can't stay in the game. In my case my gains this year exceed my loses for 2008 so when I go to average 1999 - 2009 I would still be up above 10%.

Personally I think auto policies are often handled like rebates. The companies rely on not paying even if they would have to if claims are made.

How many keep their cars past the end of their factory warranties and of those that don't how many extended warranties actually end up transferred to the new owners? These just add to their bottom lines.

 

are we talking dealer extended warranty or "as seen on tv" extended warranty?

 

Pretty much the same since neither is sold to you to loose money.