All About Extended Warranties

An extended warranty applies to a car purchase. It’s not a warranty in the traditional sense—that is, your car purchase undoubtedly came with various warranties covering parts and labor.

However, an extended warranty is an insurance policy for unexpected and expensive repairs. We won’t offer an opinion as to whether an extended warranty is prudent or not. Rather, we present you with an overview of what an extended warranty covers and the various options that may be available to you so that you can decide whether it is a practical investment for your situation.

There are two types of extended warranties: those offered by either car manufacturers or third-party providers. The latter is independent of what the car makers offer.

So, before you file your legal papers and take your steps toward entrepreneurship, we offer the following considerations:

Car Manufacturer Extended Warranties

When purchasing an extended warranty from a car manufacturer, you can purchase either a powertrain or “bumper to bumper” policy.

A powertrain warranty covers your engine and transmission against defects that would cause either to malfunction.

A bumper-to-bumper (or “limited”) warranty covers most other items in your car, including major components, navigation systems, power seats, and other items.

If you purchase an extended warranty from a car manufacturer, it typically offers similar coverage to when the car was new, extending the duration of the warranty and its allotted mileage. These warranties may include a deductible; if so, the higher the deductible, the lower the cost of the policy.

Third-party Warranties

A third-party (or aftermarket) warranty offers similar warranty coverage as a car manufacturer warranty but may have exclusions. Additionally, they may restrict where you can take your vehicle for repair and carry a high deductible. They may not guarantee that original equipment manufacturer (OEM) parts are used when making a repair, too.

Payment for repairs made that are covered under a third-party warranty is typically made out-of-pocket by the policyholder, who then submits a claim for reimbursement. The process may take several months to receive payment. As such, review the payment/ repayment terms in the policy before you purchase coverage.

While these policies have their limitations, they are sometimes the only extended warranty that is available. If both are available, a third-party warranty typically costs less than a car manufacturer’s extended warranty.

Considerations Before Purchasing

Before you commit to any type of extended warranty, it is important that you read and understand the coverage details. Things to consider include:

• Overlap with existing warranty: If your car is already under warranty, review its terms in light of your expected plans. For example, if your car has a factory warranty of three years and 12,000 miles per year, but you intend to trade it in within the coverage period, an extended warranty may not make sense for you, as you may already be covered under the existing manufacturer warranty. However, if you purchase a used car whose warranty is expiring and you intend to keep the car for several years, an extended warranty may be more useful.

• Inclusions vs. exclusions: Review the coverage distinctions in light of your concerns. If you think the electrical system may fail, make sure the warranty covers it.

• Maintenance budget: Keep in mind that extended warranties exclude routine, scheduled maintenance, such as oil changes and tune-ups. Additionally, most do not cover parts that wear out, such as brake pads.

• Duration: Review the policy to see when mileage and time begin. For instance, do they start when you become the owner, or from when the car was originally sold?

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.

This material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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