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Mechanical breakdown insurance vs. extended warranty: Which is better?

auto insurance mechanical breakdown

It's a budget buster for many drivers: Your car has broken down suddenly and needs expensive repairs. Worse, the manufacturer's warranty for the car has expired, and you're on the hook for the cost.

If you fear having to shell out money for unexpected car repairs, there are two products you can buy that can shield you from pricey auto repair bills: vehicle service contracts (sometimes referred to as extended warranties) and mechanical breakdown insurance (MBI). However, some experts aren't sold on the need for either product.

Here's a quick look at the differences between these products.

Vehicle service contracts (VSCs):

• Generally are sold through auto dealerships at the time of purchase. Repairs often must be done at a dealership or an approved repair shop. Typically, these contracts are backed up by insurance companies, not car dealerships.

• VSCs typically are bought when a car is purchased. They often are financed through the same loan the buyer uses to purchase the car, says Rob Glander, CEO and president of GWC Warranty, a provider of VSCs and related insurance and finance products.

• May not be subject to state insurance laws. VSCs are regulated differently around the country, Glander says. "It is a patchwork quilt," he says. "There are 50 states with different levels of regulation." Ask a dealerships that sells VSCs about how these products are regulated in your state.

• May be purchased for older used cars but aren’t exclusively for these types of cars.

• May be canceled for a refund.

• May be transferable to another owner.

Mechanical breakdown insurance:

• Can be purchased through car dealerships, through third parties such as credit unions, independent insurance brokers, or directly from auto insurance companies. Repairs typically can be done by any licensed repair shop, but you should read your contract carefully to be sure, says Janet Ruiz, a spokeswoman for the nonprofit Insurance Information Institute.

• May be paid in installments.

• Is an insurance product regulated by state insurance laws; the product is backed by the insurer.

• Is typically issued for new or nearly new cars. The older the car, typically the more MBI coverage will cost, says Jonathan Stein, a consumer law attorney based in Elk Grove, Calif.

• Can be canceled. The premiums can be refunded if they were paid in advance.

• Can be transferred to a new owner.

How much does a mechanical breakdown policy cost?

What will a mechanical breakdown policy cost you? Rates vary widely, says David Scott, vice president of Mercury Select Management Co.

Four key factors determine your rate:

  • The size of your deductible.
  • The make, model and age of your vehicle.
  • How many years of coverage you want.
  • The level of coverage you choose.

Mechanical breakdown insurance offerings include basic drive-train-only policies to top-level coverage where the few excluded items are listed in the plan. Scott says deluxe policies even may provide a rental car and pay your hotel bill if your car breaks down when you're out of town.

Stein says if you're paying more than $500 to $1,000 per year for an MBI policy, it probably isn't cost-effective. You would be better off taking the money and setting it aside for future repairs.

Do you really need extended warranties or mechanical breakdown insurance?

Before you delve too deep into either of these products, know that consumer advocates discourage drivers from buying either extended warranties or mechanical breakdown insurance. Rosemary Shahan, president at advocacy group Consumers for Auto Reliability and Safety, says it's thriftier to simply buy a car with an excellent reliability record. She says manufacturer's warranties usually are adequate to cover new cars.

For a used-car purchase, have the vehicle thoroughly checked by a reliable mechanic. Shahan did this herself about four years ago when buying a used Subaru. The inspection cost $96.

She recommends checking the Mechanics Files maintained by the "Car Talk" radio show for a referral to a trustworthy shop near you. If you're buying a used car from a dealership, Shahan says, you still should have an independent mechanic inspect the car.

"This is the most important $100 you'll spend on the entire transaction," she says.

Shahan warns of numerous instances when dealer-issued extended warranties turned out to be worthless. When the dealer sells a VSC, it is supposed to be backed by an insurance company. But unscrupulous dealers may simply pocket your money, Shahan holds.

Reth strongly disagrees. The products sold at car dealerships are backed up by reputable companies that hold dealers accountable, he stresses. "They don't pocket the money."

Of the two products -- VSCs and MBI -- Shahan says she doesn't favor one over the other. Rather than relying on them, "you are better off just getting a good car," she says.

Mercury's Scott recommends checking to make sure your insurer is in solid financial shape. The insurer should have no less than an A- rating from credit-rating agency A.M. Best, he says.

Can I get mechanical breakdown insurance for my car?

If you're interested in mechanical breakdown insurance, the first step is to determine whether an insurer would be willing to sell it for your vehicle. Many major auto insurance companies offer mechanical breakdown policies, including Mercury, GEICO, USAA and 21st Century, and each company has its own set of rules.

For instance, USAA offers one plan that accepts vehicles up to up to 10 years old with less than 115,000 miles on the odometer. By contrast, Mercury's plans go up to 7 years old or 100,000 miles.

GEICO’s plan is only for GEICO auto insurance customers, and only for cars with fewer than 15,000 miles that are less than 15 months old.


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