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Car warranties versus auto insurance

Both car warranties and auto insurance pay for vehicle repairs, but they're different animals, and it's important to understand the distinctions in order to avoid making a bad purchase.

A car insurance policy covers repairs in limited circumstances, usually involving crashes:

  • If someone crashes into you, their property damage liability insurance will pay to repair your car up to their coverage limit.
  • Your collision insurance will pay for your car repairs after an accident, whether or not you are at fault.
  • Your comprehensive insurance will pay for your car repairs if you hit a deer, if vandals or a natural disaster damage your car, or if something falls on your car.

Insurance vs. warrantiesThen there are car repairs that aren't connected to crashes. Warranties, extended warranties and mechanical breakdown insurance cover parts and labor when the car breaks down.

  • Warranties: The original bumper-to-bumper factory warranty guarantees the engineering and parts for a certain amount of time or mileage. Some used vehicles also come with a warranty. You don't have to pay extra for the warranty -- it comes with the car.
  • Extended warranties: Most automakers also offer extended warranties. Car dealers and independent businesses sell them, too. Technically, an extended warranty isn't a warranty; it's a service contract. You pay a lump-sum fee upfront, or the cost is rolled into your car loan. You can buy an extended warranty when you purchase the car or years later.
  • Mechanical breakdown insurance: Mechanical breakdown insurance is similar to an extended warranty. The coverage also promises to pay for certain repairs and protect you from killer bills, and both are intended to pick up where the original manufacturer's warranty leaves off.

Mechanical breakdown insurance or extended warranty?

Unlike extended warranties, mechanical breakdown insurance is backed by insurance companies, which are regulated by state insurance departments. Generally states require insurers to base premiums on expected claims, seek approval for insurance rates and maintain adequate financial reserves to pay claims.

There are other differences, too. Compared to extended warranties, mechanical breakdown insurance is easier to cancel. Rather than paying a lump sum upfront, you pay a premium for the policy period, such as six months, and can cancel at any time.

The insurance policies often offer more flexibility. Extended warranties sold by dealerships or automakers usually require you to take the car to the dealer or mechanic certified by the factory for repair. Many mechanical breakdown insurance policies let you take the car to any licensed repair shop.

You can buy mechanical breakdown insurance as part of your car insurance policy from some insurers, such as GEICO and Mercury Insurance Group. You can also buy the coverage separately through some banks and credit unions.

You can purchase an extended warranty anytime, although consumer advocates warn against falling for direct-mail scams and fast-talking telemarketers that try to scare you into buying them.

Generally mechanical breakdown insurance is available only for newer cars. GEICO's product, for instance, is available for new or leased cars less than 15 months old and with fewer than 15,000 miles. Once you buy it, you can renew it for up to seven years or 100,000 miles, whichever comes first. The company says its policy covers repairs to all mechanical parts, except for maintenance wear and tear, after you pay a $250 deductible.

Weighing the costs and benefits

The cost of the mechanical breakdown insurance varies according to how much it covers, the size of the deductible and the make and model of your car. Some companies offer different tiers of coverage, with more-expensive policies covering a wider range of repairs. Some policies also include extras. Mercury's Platinum plan comes with 24-hour roadside assistance, rental vehicle assistance and tire protection.

Thinking about buying? Ask these questions:

  • What parts and systems does the insurance cover?
  • What does it exclude? Keep in mind that most policies exclude parts that wear out, such as brakes and shocks, and exclude repairs caused by damage due to improper maintenance.
  • How much is the deductible, and how is it applied -- by repair or by visit to the shop?
  • What extras are included?
  • Where can you get your car repaired?
  • How are claims paid?
  • Is there a limit on claims?

Mechanical breakdown insurance might be worth considering if you plan on driving the car years past the factory warranty. Or you could sock away the money you'd spend on premiums and save it for repairs down the road.

More from Barbara Marquand here

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