Sunday, July 18, 2010

Breakdown Insurance

A mechanical breakdown insurance, also known as auto extended warranty, is supposed to be insurance that covers your repair bills in case your car needs BIG repairs. Two of the biggest names (i.e. advertise a lot on TV) are Mogi, and StopRepairBills. Your automaker would also offer them as well, as would the dealer. They are very profitable... for the seller, not the buyer. Thus, they are usually a bad deal for you.
Please note that I am NOT against either company. They offer a service that some people want. However, you may not understand all the pros and cons of what they offer.

Here's a few things you need to know before you call their number and pay up.

1) Neither companies un-named above are the actual policy issuers. Both are sales agents who will "match" you with the appropriate policy issuers / administrators (who remains unnamed in their ads). In other words, they are actually more like 1-800-DENTIST  who match you with the right vendors, even though in the ads they sound like they actually sell the policies. 

2) Deductibles are barely mentioned in their ads. All they claim is you don't have to pay for repair bills. There's a small disclaimer somewhere that basically says your deductible depends on the specific policy you buy. And it could be several hundred dollars. Obviously, the higher the deductible, the cheaper the policy.

3) The policies are far more expensive than you think. Quotes go beyond two thousand PER YEAR. And you are often pushed into buying multi-year policies for "discounts".

4) You are required to pay for regular maintanence, and actually provide PROOF of such maintanence, else your policy is VOID! (It's in the policy, really.) The policy issuers are known to have denied claims UNTIL such evidence is submitted, and you better have all the i's dotted and t's crossed! (And don't miss even ONE!). Thus, paying for one of these policies may actually INCREASE your maintanence bill, NOT decrease it as you hoped, esp. when you throw in the deductible!

5) You are automatically pushed toward the highest coverage (read: the most expensive), because it's the only way you can cover almost everything. Murphy's law pretty much predicts that the stuff you don't cover is the stuff that WILL break. However, did you actually analyze what may break, how likely it is like to break, and how much are the repair bills? And thus, what are the expected cost PER YEAR? Of course not. That's the insurance company's business. It's called actuarial science (or probabilities, close enough). They did the numbers already, so they came up with a rate that will make THEM a lot of money, not you. They are relying on your ignorance.

6) How can a company insure something they haven't even seen? They do it by making the "worst case assumption", not the average case. They have built-in a large enough profit margin that even if your car is a virtual junker that needs lots of parts, they probably won't lose much money. For an average car, the policy would be VERY very profitable... for them, that is.

7) Newer cars already have longer and longer warranties. Most new cars come with 3/36 bumper to bumper and 10/100 powertrain warranty, and very rarely would you see major repairs in the first 3-5 years of the vehicle any way, if you do the proper maintanence to start with.
If you are considering such policies, there are many things you should look into:
1) What are excluded? i.e. what is NOT covered? Even so-called bumper-to-bumper warranties have exclusions, like "not for commercial vehicles", "not for racing, rally, competition, etc." The more expensive the policy, the more it will cover. Aftermarket parts are never covered.
2) Claim limit: do you need to use specific repair shops such as AAA approved or CSE approved? Or would just any licensed facility would do? Or just those in a certain "network"? Do you have those in locations convenient for you? How about when you travel?
3) Does the policy come with any perks, such as road rescue services (tow truck, battery service, emergency gasoline delivery, key lock-out), rental car, trip interruption insurance, etc? The less perks, the less expensive the policy.
4) What is the cost-benefit ratio for the policy, vs. just putting the money in the bank for those repairs when they *do* come up?
5) Is your car actually covered? Generally the newer the car, the less it is to insure for breakdown. Most insurers won't touch vehicles over 100000 miles.
6) Did you shop around? Dealer usually tack on about 200% markup on those policies, so it can be VERY profitable. ANYTHING in a dealership can be negotiated. While it is hard comparing apples to oranges your car insurer may offer such a policy as well for comparison.
Consider all the factors before committing.