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An extended auto warranty is a service contract set up between you and the car warranty company. The money paid to the warranty company is deposited in a reserve account that's kept in the event the company goes out of business. Outstanding contracts would then be covered by the money in the reserve account.
There are two basic types of coverage: mechanical breakdown, and wear and tear. Some warranty contracts include extra services like car rental, towing, lost key lockout and toll-free assistance. Coverage can be purchased at the dealership, or from a third-party company. -
Whenever you purchase an extended warranty contract, you're actually dealing with two different companies--the company that sells the warranty, and the company that administers it. It's the administering company who actually pays up when a claim is filed.
Coverage under an extended warranty is technically not insurance coverage, though how it works is similar to insurance. The older the car, the higher the cost for coverage, so the sooner you purchase a warranty, the cheaper it will be. Cars listed as unreliable, or problem-prone in "Consumer Reports" also carry a higher priced warranty coverage. -
When deciding what type of extended coverage you need, keep in mind that any future car problems you have may involve a mechanical breakdown, as well as an issue related to wear and tear. A mechanical breakdown warranty might not replace a busted radiator if the hoses leading to it are worn out and in need of replacement. So in a sense, the wear-and-tear warranty picks up where your mechanical breakdown coverage leaves off.
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There are four levels of coverage to choose from when deciding on an extended warranty. The luxury coverage warranty is the ultimate bumper-to-bumper protection, and includes the newer luxury items included in car packages like DVD systems, GPS navigation, Internet access and emission systems. The bumper-to-bumper warranty is the next level in terms of coverage, however these particular contracts only list what is not covered by the warranty. This type is sometimes called an exclusionary warranty because of how the contract is laid out.
Intermediate warranties are the middle ground when considering price and coverage. It's a basic warranty, but not bumper-to-bumper, so some parts won't be covered. The big-ticket item warranties are specifically for major repairs, like transmissions and engines. These are offered with used car purchases, and may or may not include wear-and-tear coverage. -
Regardless of which type of coverage you decide on, all extended warranty contracts stipulate that required maintenance must be performed on the car as listed by the manufacturer's guidelines. This includes oil changes, fluid checks, radiator flush and fills, and whatever else is listed in the owner's manual. Keeping a record of any repairs made to the car might come in handy if you ever have to dispute a denied claim.
Getting a good price for a warranty package doesn't necessarily mean it's good coverage. Bargain prices are oftentimes a sign that the company administering the warranty is a high risk; meaning, lots of denied claims, and little to no reserve account money to cover claims should the company go out of business. Any legitimate warranty administrator will be listed on Web Assured or the Better Business Bureau, so be sure to look up whatever company you're considering.
