Car Warranty vs. Auto Insurance: To Buy or Not to Buy [Updated]

Is an extended warranty car insurance? No, they aren't the same thing. Warranties cover parts or manufacture failure, and car insurance covers damage from accidents.

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Zaneta Wood, Ed.S. has over 15 years of experience in research and technical writing bringing a keen understanding of data analysis and information synthesis to reach a wide variety of audiences. She studied adult education and instructional technology at Appalachian State University as well as technical and professional communication at East Carolina University. Zaneta has prepared technical p...

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jan 26, 2021

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Here's what you need to know...

  • Extended warranties are not the same thing as car insurance
  • A new vehicle from a dealer will typically come with a factory warranty
  • You can purchase an extended warranty through a few different options, but make sure to read the fine print

Is extended warranty insurance? When it comes to buying a car, there are enough hard decisions to give anyone a headache, and by the time you get to the paperwork and the salesperson looks at you and asks if you’d like to purchase the extended warranty coverage, well…sometimes you say “yes” just to get out the door faster.

But before you say “yes” to a car warranty, you should know what you’re getting into: how much it’s going to cost, whether you really need it, what it covers that your automobile insurance doesn’t, and more!

Let us help you take the guesswork out of extended car warranties so that the next time you sit down to purchase a car, you can feel equipped with the knowledge you need to add on that warranty or not. Before we get into what warranties cover, though, let’s answer a basic question:

Are car warranties and car insurance the same thing?

What’s the difference between an extended warranty and insurance? Although there may be some overlap in what they cover, car warranties and car insurance are not the same thing.

Generally speaking, your car warranty is going to cover parts or manufacture failure, and your car insurance will cover damage due to accident. However, overlap can occur if, say, you get into an accident due to parts or manufacture failure.

Furthermore, we’re all required to have automobile insurance, but warranties are optional. Let’s take a look at insurance first!

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The Basics of Automobile Insurance Coverage

Everybody has to have car insurance of some type, no matter what state you live in (pssst: it’s the law!). But types of required insurance will vary state to state, and you might opt to have more than the requirement, based on personal preference and past experiences.

Here are the basic types of automobile insurance you might either be required to have or desire to have, depending on your circumstances:

Coverage ConsiderationsDescription
LiabilityMost states require you set amount of liability coverage which protects other drivers in the case of an accident
ComprehensiveThis coverage and collision coverage are typically required by your lender or lease holder. If you own your vehicle outright, this is an optional coverage. It will pay for damage from non-accident related events such as hail, vandalism, and theft.
CollisionThis provides financial protection for your vehicle. It will pay for damages after a crash.
Personal Injury Protection (PIP)This coverage will pay for your own medical costs including lost wages.
Medical Payments (MedPay)Similar to PIP, MedPay covers injury costs but doesn't cover lost wages like PIP does.
Uninsured/Underinsured Motorist ProtectionInsurance companies are required to offer this coverage to you and it will pay for your own damages beyond what another's liability covers when they're responsible for an accident.
Guaranteed Auto Protection (GAP)You may owe more on your vehicle than it's worth because of how quickly cars depreciate. This coverage will pay the difference between the value and what you owe if your vehicle is totaled.
Personal Umbrella Policy (PUP)This option provides an "umbrella" of coverage over several types of insurance.
Rental ReimbursementIf your car is a total loss or needs repair, do you have another vehicle you can drive? If you'll need a rental, you should consider this option.
Emergency Roadside AssistanceYou can purchase this option from your insurer or a driving club.
Pay-As-You-Drive or Usage-Based InsuranceThis isn't a good choice for everyone, but if you drive few miles, it might be cheaper for you to purchase this kind of coverage.
Non-Owner Car InsuranceThis option is for people who do not own a car but borrow one occasionally.
Modified Car Insurance CoverageIf you've made modifications to your vehicle, your regular full coverage won't take those changes into consideration when paying for damages. Adding special coverage for those modifications will protect the value of them.
Windshield CoverageWindshield coverage will help you pay for the replacement of your broken glass (check state laws for specifics)
Mechanical Breakdown InsuranceThis coverage is similar to a manufacturer extended warranty and you should weight the benefits of both a warranty and breakdown insurance to see which is best for you.
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Now that we’ve gone through the basics of automobile insurance, let’s turn to car warranties.

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Knowing Your Way Around Car Warranties (So You Don’t Get Something You Don’t Need)

Do you need a car warranty?

The short answer to this question is, maybe. It depends on several factors, so let’s break it down:

 – Buying New: New Car Warranties

When you buy a new car, it’s going to come with a factory standard warranty. Typically this warranty lasts 3 years or up to the first 36,000 miles you put on the car, but warranties can vary. This warranty is standard and desirable to most buyers!

But many people investing money in a new car want more than that 3-year coverage, and if you buy used, you may also want to have warranty coverage. That’s where extended warranties come in.

 – Buying Used: Extended Car Warranties

Extended warranties come with a variety of options, and this is where you really want to be sure you’re reading the fine print.

An extended car warranty is a warranty that covers repairs on a vehicle beyond the life of the factory warranty limited to a period of time or amount of usage.

Most dealerships offer several “plans” on their extended warranty packages. You should be able to purchase bumper-to-bumper packages that basically cover everything from damage incurred in accidents to routine maintenance, or more limited, but affordable, powertrain or corrosion warranties that cover only the more expensive aspects of your vehicle.

Extended warranties are offered by:

  • Car dealerships
  • Car clubs like AAA
  • Special warranty companies

Many extended warranty packages come with deductibles attached and other requirements to maintain the warranties, so be aware of what you’re purchasing!

Still not sure? Let’s break it down by pros and cons:

 – Pros of Extended Car Warranties

  • Peace of mind and security. If you know you’re going to own your vehicle for a long time, purchasing an extended warranty can give you an added dose of peace of mind that when something goes wrong, you’ll have coverage to be able to fix it.
  • Preservation of the vehicle’s value. If you’ve invested money in the purchase of a high-value vehicle, you might want to go ahead and invest more value into the purchase of that extended warranty, too. It will preserve the value of the vehicle to have all repairs done with original factory equipment.
  • Transferable warranties. If the warranty you purchase is transferable, it makes your car more appealing to the buyer when the time comes.
  • Financing. No need to pay for those pricey warranties up front! Extended warranties are usually available for financing right with the payments on your vehicle.
  • No repairs guesswork. If you don’t like wondering whether the mechanic is telling the truth about what needs to be done on your vehicle, having an extended warranty takes a lot of the guesswork out of repairs for you.

– Cons of Extended Car Warranties

  • They are a gamble. Extended warranties do cost extra on your car buying experience, and you may never use them. A special Consumer Report in 2014 showed that 55% of car owners never used the warranties they’d purchased over the lifetime of their policies.
  • The devil is in the fine print. Make sure you thoroughly read the fine print before purchasing your extended warranty to know time and usage limitations. You don’t want to end up with repairs that aren’t covered after months, or years, of paying into a warranty package.
  • Not always transferable. This will also be in the fine print, but extended warranties are not always transferable from one owner to the next. Make sure to do your research!

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– A Few Extra Tips

  • Shop around. If you’re going to buy an extended car warranty, shop around! You don’t have to purchase the one offered to you as a “hard sell” at the end of your car buying experience. Take the time to make sure you’re getting exactly what you want and need.
  • Know your brand. Some cars are more reliable than others. If you purchase a brand of vehicle that is notorious for engine problems or brake issues, you might want to consider that extended warranty! But if you buy the most reliable car on the market at good mileage, you can probably consider holding off.
  • Know the warranty business. Generally speaking, car company warranties are going to be better than third-party warranties.
  • Pay yourself instead. Instead of paying money into an extended warranty plan that you may never use, consider opening a savings account just for car repairs, and pay that same amount every month straight into that account. The money will still be there gathering interest, and if you never use it over the life of your car, you still have it.

Car Warranty Reviews

If you’re considering a warranty, the companies listed below are some of the major players. We’ve spent time researching each company and writing a review so you can make an informed decision.

Make sure if you do choose to purchase an extended warranty, you thoroughly research the company, the coverage, and the costs — and compare with your own personal finances and its ability to handle the risks involved in car ownership.

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