What is extended auto insurance?
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UPDATED: Apr 29, 2019
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Extended auto insurance policies are more commonly known as extended warranties. In recent years, these policies have become more and more popular as consumers often keep and drive their vehicles for many years beyond the expiration of their original factory warranties.
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After a manufacturer’s warranty expires, vehicle owners may purchase new coverage through a number of private companies. An extended warranty or insurance plan will continue to provide coverage for certain types of vehicle repairs over a limited period of time.
As with most insurance coverage, there is usually a deductible involved, a portion of the repair bill that the owner is obligated to pay before the auto insurance company will cover the balance.
Deductible amounts vary depending on the company and type of repair work that is being done. A deductible can be as low as $50 for some covered services, but will generally average between $100 and $200 in most cases.
Original Vehicle Warranties
Every new car manufactured and/or sold in the United States comes with some type of warranty. A warranty is a form of guarantee that the car will operate properly during the initial years of ownership.
By offering a warranty, the manufacturer takes responsibility for the replacement of defective parts or repairs that are not the fault of the owner, for a period of time or a specific number of miles.
Some systems on a car, such as an engine, drive train, and transmission are covered for longer periods of time than other, less critical, parts.
Most common new car warranties last for a minimum of three years or 36,000 miles, whichever comes first.
Several foreign car manufacturers, such as Kia and Hyundai, have popularized longer warranties which can last up to 10 years or 100,000 miles.
Car parts such as tires, brake pads, headlamps, etc, that are subject to normal wear and tear and are frequently replaced, are not covered by vehicle warranties.
Tires, however, may have their own warranty coverage depending on the manufacturer.
Extended Insurance Contracts
Changes in the economy and the increased costs of new cars have prompted many drivers to consider purchasing used vehicles far more often than in the past.
Cars may last longer but eventually, repairs will be required, and extended insurance companies have jumped in to provide coverage for these eventualities.
Dealers that specialize in used vehicles will almost always offer extended warranty policies when they sell a used car. In point of fact, car dealers see significant profits from selling these plans.
By selling both the car and an extended service contract, dealers double their profits. In addition, they lock customers into coming back to their dealership for service, over and over again.
This is another reason dealers offer “free” services such as oil changes. There is generally more profit in selling auto insurance and repair services than in selling cars.
Insurance or Warranty
Consumer Reports recently published a very informative article defining and describing extended insurance plans.
The consumer watchdog group contends that extended warranties are neither insurance contracts, as defined by most states, nor warranties as defined in Federal law, but prepaid or extended service contracts.
Marketing practices by these service companies lure consumers into purchasing extended contracts by describing them as “insurance-related.” Buyers are urged to gain “peace of mind,” by paying for added protection for their vehicles.
It’s also important to note that extended warranty companies are not subject to the same government oversight, regulation, and scrutiny as true insurance companies.
Extended service contracts are often sold on the premise that there could be catastrophic repairs in the future such as a transmission or engine replacements which can cost thousands of dollars.
Neither of these events is likely to happen to the vast majority of vehicle owners.
Beware of Extended Insurance Scams
The lack of regulation of extended warranty companies was also cited in a recent Forbes article. The Forbes reporter comments on the sharp increase in direct mail marketing pieces offering extended auto warranty programs.
Legal looking documents entice buyers to purchase extended service contracts and tell you that your factory warranty has recently come to an end and you (and your vehicle) are unprotected.
These mailers are not from your local auto dealer. They are certainly not coming from legitimate insurance companies and unfortunately are often not from reputable business concerns at all.
They prey upon the worries of the average vehicle owner whose car may break down and who may be unable to afford repairs or the auto insurance rates on a policy they need.
Extended warranties or service contracts can be helpful in saving money on vehicle repairs, but care and consideration should be exercised before agreeing to purchase any extended contract.
Consumers should also make sure that the dealer or shop they use for repairs will honor the warranty contract they have purchased.
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