Insurance vs extended warranty

What each one covers

• Car insurance — collision, theft, weather, fire, vandalism, animal strikes, liability to others
• Extended warranty or vehicle service contract — mechanical or electrical failure of covered components
• Mechanical breakdown insurance — the same risk, sold as a regulated insurance product by some insurers

The distinction that matters if something goes wrong

A vehicle service contract sold by a dealer or third party is generally not insurance, though some states regulate these contracts specifically. Mechanical breakdown insurance is insurance, sold by licensed insurers and regulated as such.

That difference decides who you complain to. With an insurance product, your state insurance department accepts complaints and can require a response. With a service contract, your route may be your state attorney general or consumer protection office instead.

Ask directly which one you're being sold, and who regulates it.

What neither covers

• Routine maintenance — oil, filters, fluids
• Wear items such as brake pads, tyres and wiper blades
• Damage from neglected maintenance
• Cosmetic damage and rust, in most contracts
• Pre-existing faults, on either product

Questions before buying a service contract

• Is this insurance, and if so which insurer stands behind it?
• Is it a stated-component list, or exclusionary — the latter is generally broader
• Who performs repairs, and can I use my own garage?
• Is it transferable if I sell the car, and does that add value?
• Is the price negotiable — at a dealership it very often is
• What is the cancellation and refund policy?

The honest comparison

Insurance covers a low-probability, high-cost event you couldn't absorb. A service contract covers repairs that are more predictable and, for many vehicles, less expensive than the contract.

Setting the money aside instead is a legitimate alternative for a reliable vehicle, and it isn't for a complex out-of-warranty one where a single failure could exceed a year of contract cost. Decide on your specific vehicle rather than the category.