Car Warranty vs. Car Insurance

Car warranty vs. car insurance: What’s the real difference?

The difference comes down to what types of problems they cover. A warranty helps cover the cost of repairs for certain mechanical breakdowns, while car insurance protects you from accident-related damage, liability and other risks required by law.

We’ll take a detailed look at the ins and outs of each type of coverage later in the article, but the table below provides a quick summary of the key differences between the two.

What is a car warranty vs. car insurance?

Car warranties and insurance protect against different risks, and only insurance is required by law. The two products differ substantially in what they cover, how much they cost, their relationships to state laws and in other ways.

What a car warranty is

An extended car warranty is a vehicle service contract. A vehicle service contract is “extended” because it provides protection after a car’s manufacturer's warranty expires. Coverage includes repairs needed due to mechanical failures under normal operating conditions.

“Perhaps the biggest difference between the warranty and a vehicle service contract is the fact that the latter must be bought, where the original warranty comes with the price of a new car,” according to Matas Buzelis, business development manager at the vehicle history report platform carVertical.

What car insurance is

Car insurance, on the other hand, covers costs related to repairing vehicle damages from unexpected incidents such as collisions, theft and vandalism. It’s legally required in nearly all states to protect drivers, passengers, other motorists and pedestrians in case of an accident.

Coverage differences: what each policy pays for

Another major difference between auto warranties and auto insurance is what they cover. Generally speaking, car warranties cover the mechanical components of the policyholder’s vehicle and pay for repairs resulting from regular usage.

What car warranties cover

The systems and parts that are covered under a warranty are defined in the contract and vary by plan and provider. Examples of components usually covered by a car warranty include:

• Engine parts, such as the crankshaft and pistons
• Transmission and drivetrain systems
• Electrical systems like the alternator and starter motor
• Air conditioning and heating systems
• Steering components

What car insurance covers

Car insurance policies can provide coverage for the owner’s vehicle and other vehicles following a collision. Insurance may also cover the owner’s vehicle when it is damaged by occurrences like vandalism or fire, depending on the policy.

There is a significant difference in coverage between types of auto insurance policies. These policies include:

• Liability insurance: Covers damages to other vehicles involved in a collision when the owner is ruled at fault.
• Collision insurance: Covers the owner’s vehicle when it is damaged in a collision, regardless of who is at fault.
• Comprehensive insurance: Covers damages to a vehicle from non-collision sources such as weather, theft or animal strikes.

Real-world scenarios: warranty vs. insurance

To illustrate the differences in coverage between warranties and insurance, we’ve provided a few examples of vehicle damage and the type of policy that covers the repairs in the table below.

Exclusions and coverage limits

Auto warranties and insurance policies also have exclusions, or issues they won’t cover. Coverage exclusions are listed in contracts.

Common car insurance exclusions

Car insurance coverage is typically limited to sudden, accidental damage. That means that an auto policy won’t cover mechanical breakdowns that aren’t the result of a collision or other incident. Common exclusions include:

• Routine maintenance, such as oil changes and brake pad replacements
• Wear-and-tear items like tires, wiper blades and brake pads
• Damage from accidents, weather events or improper use

Common car warranty exclusions

The following are some of the most common car warranty exclusions:

• Pre-existing damages
• Breakdowns caused by failure to perform routine maintenance
• Wear-and-tear items like brake pads and air filters
• Oil changes and other maintenance services
• Cosmetic damages
• Aftermarket components
• Damages resulting from unapproved vehicle use

Coverage limits and claim caps

Another difference between the two policies is coverage limits. Vehicle warranties may or may not have limits on how much providers pay toward repair claims, but that varies by plan and provider.

Auto insurance policies have coverage limits on how much they will pay toward an individual claim. These limits must meet or exceed state minimum requirements, which vary by state. Policyholders can opt for higher limits if they are willing to pay higher premiums.

In either case, it is heavily recommended that you read all policy documents carefully and take note of coverages, exclusions and coverage limits.

Cost differences: price, payments and deductibles

Drivers have some say in the cost of both types of policies through their choice of coverage plan. Warranty providers often offer multiple coverage options, but may have eligibility restrictions based on vehicle details. As you’d expect, the more coverage you purchase, the more that policy is likely to cost.

Average car warranty costs

Based on our research, the average cost of an extended car warranty ranges from $600 to $1,000 per year of coverage.

The price of an auto warranty mostly revolves around details about the vehicle being covered. Car warranty providers set prices based on a vehicle’s age, make, mileage and, in some cases, condition.

» TIPS: How to get a cheap car warranty

Average car insurance costs

The national average cost for full-coverage car insurance is around $2,000 per year. Similar factors play a role in the price of car insurance premiums, but insurers consider additional information. Major car insurance cost factors include your age, driving record and even credit score.

Location also influences premiums, with local risk factors like accident rates and crime rates coming into play. Insurance prices also vary by state, with minimum insurance requirements affecting how much insurers charge for coverage.

» TIPS: How to get cheap auto insurance

Monthly vs. upfront payments

As many drivers can’t afford to pay the entire price of a policy upfront, warranty providers and insurance companies offer the option of splitting the cost into monthly payments. Providers of both types of coverage sometimes offer discounts for paying in full upfront.

Some providers, like Zeigler Auto Group, offer six- or 12-month interest-free payment plans. A representative from Zeigler told us that about 60% of its customers pay upfront and 40% finance.

Deductibles and how they affect price

A deductible is the out-of-pocket cost you must pay toward a warranty or insurance claim. Car warranty deductibles usually range from $0 to $250, while car insurance deductibles have a much wider standard range of $0 to $1,000.

Insurers generally offer policyholders more control over the deductible for their policy, but some warranty providers also allow car owners to select their own deductible. As deductibles for either type of policy go higher, the price of that policy tends to go down.

Who sells car warranties vs. car insurance?

Drivers can purchase warranty plans from a variety of sources. Only car insurance companies can sell auto policies.

Manufacturer vs. independent extended car warranties

Many automakers sell extended warranty coverage through their dealerships, but you can also purchase plans from third-party providers, either directly or through used car dealerships.

There are noteworthy differences between auto warranties sold by vehicle manufacturers and those sold by third-party providers. The table below highlights some of those distinctions.

Car warranty vs. car insurance: legal requirements and regional risks

Perhaps the biggest difference between auto warranties and auto insurance is in their legal requirements.

Drivers are required to have an insurance policy that meets or exceeds minimum requirements in nearly every state. If you're financing your car, the lender will likely require you to have full coverage, which includes liability, collision and comprehensive insurance. Nearly all car loan lenders require this protection until the loan is paid off.

Neither car warranties nor car insurance typically cover damage caused by normal wear and tear.

In some cases, drivers can self-insure by depositing an amount of money in an account set by state regulations. Failure to have sufficient insurance or the equivalent can result in punishments that include fines, suspension of driving privileges or even jail time.

Car warranties aren’t a legal requirement anywhere in the U.S. In fact, some states forbid companies other than manufacturers from selling coverage labeled as a car warranty. Similar coverage can be sold by car insurance companies as mechanical breakdown insurance in states such as California. Some companies, like olive, offer both MBI (for California residents) and warranty plans.

How to decide what coverage you need

Whether you’re shopping for a car warranty or an auto insurance policy, it’s important to thoroughly research your options and consider your decision carefully. The difference between overpaying for coverage or choosing a low-quality provider could cost you hundreds of dollars or more.

Car warranty buying checklist

Follow the steps below to ensure you find the right plan and provider for your vehicle.

1. Consider whether you can comfortably pay $2,500 or more on short notice for car repairs.
2. Determine your budget for auto warranty coverage.
3. Research your vehicle’s reliability rating online to learn the likelihood of needing major repairs.
4. Look up average annual repair costs for your vehicle to compare them with the cost of a warranty.
5. Evaluate whether you prefer the flexibility of a third-party warranty or the brand support of a manufacturer warranty.
6. Think about whether having coverage provides value in the form of peace of mind.
7. Decide what level of coverage you want to buy for your vehicle.

Car insurance buying checklist

Use the steps listed below to help you identify your insurance needs.

1. Look up the value of your vehicle on sites like Kelley Blue Book to weigh against the price of a policy.
2. Analyze your monthly budget to determine what you can afford to spend on car insurance.
3. Consider the threat of local risk factors such as collision rates, auto theft rates and severe weather in your area. If you live in a high-risk area, collision and comprehensive coverages are more important.
4. If you lease your vehicle or are still paying off an auto loan, determine whether the lessor or lender has minimum insurance requirements you must comply with.
5. Look into additional coverage options such as rental car reimbursement, emergency roadside assistance or trip interruption. These coverages can often provide substantial value for the cost.

How to choose a reputable provider

The car insurance company or extended warranty provider you buy coverage from is also a key consideration. Providers vary in terms of price, coverage options, customer support, claims handling and more.

For both warranties and insurance, comparing quotes is critical to getting the best price. It’s a good idea to get quotes from at least three providers to compare before making a decision. The difference in cost may be bigger than you think.

You’ll also want to compare providers’ reputations. Read customer reviews for providers you’re considering. Look specifically for patterns of complaints about customer service and claims processing. Such patterns suggest a provider has consistent problems and should be avoided.

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