Extended warranties: we priced the arithmetic on nine of them and eight were bad bets

An extended warranty is an insurance product. That framing is the whole article, because insurance has arithmetic and the arithmetic is usually visible at the till.

The one-minute test

Three numbers, and you can get all three while the assistant is still talking.

The premium — what the warranty costs. The replacement cost — what the item costs to replace today. The excess — what you pay if you claim.

Then: premium ÷ (replacement − excess). That is the share of the item’s value you are paying to insure it.

For the nine warranties we priced on ordinary household purchases, that share ran from 9% to 41%.

Why a fifth is roughly the line

An insurer needs the premium to cover expected claims plus costs plus profit. So a 20% premium implies the insurer expects meaningfully fewer than one in five items to fail within the term — and they have the failure data, and you do not.

When the premium exceeds about a fifth of the replacement cost, you are not really insuring the item. You are pre-paying for a fraction of it, and you would be better off keeping the money and buying a new one if it breaks.

Eight of our nine were above that line. The exception was a warranty on a large appliance where the premium was 9% and the out-of-warranty repair cost was a substantial share of replacement — which is the shape of the case where these products make sense.

The three things the pitch leaves out

You may already be covered. Statutory rights in many jurisdictions require goods to be of satisfactory quality and durable for a reasonable period, which can extend well past the manufacturer’s warranty. That protection is free, already yours, and never mentioned at the till.

Your card may cover it. Several credit cards extend manufacturer warranties automatically on purchases made with them. Check before buying a product that duplicates it.

The failure curve is not flat. Electronics tend to fail either very early — inside the standard warranty — or late, after the extended term has expired. The extended warranty covers the middle, which is the least likely window.

Where they do make sense

We would not say never. Three cases:

High repair-to-replacement ratio. Large appliances where an out-of-warranty repair costs a big fraction of a new unit.

Accidental damage cover on something portable and expensive. This is a different product from a reliability warranty and priced differently; screens get broken far more often than motherboards fail.

When the premium is genuinely small relative to value and the item is central enough that being without it for two weeks is itself a cost.

The pressure is the tell

The one behavioural signal worth trusting: extended warranties are sold hardest at the moment you have already decided to buy, by somebody whose commission depends on it, with a stated deadline of “only available today”.

A good insurance product does not need that. If the arithmetic works, it works tomorrow — and every retailer we asked was willing to sell it later, which tells you the deadline was not real.