But I have another. A warranty is fundamentally different than most products other than an insurance product. You’re transferring risk. Most other products don’t involve risk transfer. Since the seller typically knows the distribution of risk better than the buyer the seller makes money on average. The premium, on average, is above the expected value of the coverage.

Of course you may know your risk better than the seller. So you can win with insurance. But, on average you won’t. On average you’re better off self-insuring.

Yet some cannot self insure for some risks (my prior comment).

Some insurance is purchased with the hope you never need it. That’s not true of most other consumer goods. Sounds like a riddle: what’s something you buy but don’t want to use? {Home, life, health, auto, disability, …} insurance.

Buying a warranty is not new. Whenever we buy a new car, we also buy a warranty. That warranty comes “free” but the price is built into the price of the car. I think the trend is increasing the warranty coverage, not cutting it and selling the car at a lower price. Some new cars also come with “free” maintenance for a few years. People buy new cars with free warranty and cars with free maintenance all the time. It’s not irrational. People make decisions based on price and value received.

Therefore I must say “it depends” when it comes to whether one should buy an extended warranty. The very first question is “at what price?” The next question is “what do you get?” Come think about it, it’s not different from any other purchase decision, is it? Is a Honda Civic worth $X? Is a Ford Focus worth $Y? Are leather seats worth $Z?

For anything that could be financially catastrophic (loss of your home, severe health problem) it is sensible to pay the risk premium for most people.

For some people loss of a vehicle through accident or collision is a large enough financial shock to warrant insurance.

Vehicle repairs could be costly for some people, but the size of the population for which insuring for those makes sense has got to be smaller than for the foregoing types of events.

Then there are less expensive appliances for which extended warranties are offered. These have got to be a bad value for almost everybody.

My rule is that if I can afford to self-insure I do so. That leaves me only buying insurance for health, disability, life, home, auto collision/accident (newer vehicles only), and various forms of liability coverage. I’ve never bought an extended warranty and it is hard to imagine I ever will (I get some extended coverage for some purchases via my Am. Ex.).

1. First of all, it wasn’t my decision to buy an extended warranty. I was only asked to shop for one.

2. Second, like any insurance, the insurer is expected to make money on average. That doesn’t mean all insurance is bad for the insured. After all, we buy insurance all the time.

3. This family member already uses the dealership for all services, even for oil changes. He’s had multiple bad experiences with 3rd party shops and he’s happy with the dealership’s repair service. He thinks the predictable outcome and efficiency is worth the price he’s paying.

4. The specific extended warranty program I was asked to shop for covers everything except windshield wipers, battery, brake pads, and tires (”wearable” items). The cost differential on non-covered repairs is minimal.

1. The manufacturer knows more about the vehicle than any consumer does. Therefore, on average shouldn’t the advantage be to the manufacturer? Shouldn’t the price of the repair insurance (that’s what it is) be higher than the expected cost of repairs?

2. Having such insurance may motivate the holder to visit the dealer more often than (s)he would otherwise. Not all repairs are covered. Dealer repair costs are much higher than a non-deal repair shop. Won’t this lead to higher repair bills for non-covered repairs? (Visit http://www.cartalk.com/content/mechx/ to find mechanics recommended by the Car Talk community.)

Together, points 1 and 2 are what have always led me to ignore any thought of buying an extended warranty for a car. The only argument I can see for it being a good idea is if you know you have a crappy car. That is, you know you are a worse-than-average risk of using the repair insurance. I think if I were confident enough in that opinion I would try to sell my car and get a better one.