Even though they can be pretty comprehensive, a typical auto insurance policy has its limits and only pays for things that are totally out of the owner’s control. A blown up motor or other issues are expected and therefore they are within the scope of a Mechanical Breakdown or Car Repair Insurance that comes as an extra layer on top. It is a provision like a warranty that pays for repairs and replacement of engine, transmission, axles, air conditioning, electrical, fuel and steering systems and other malfunctions.
You normally don’t need this for new vehicles because they come with manufacturer’s warranty that can last 3 to 5 years or up to a certain mileage like 60,000. Once it expires, you have three options. You can contact the dealership and extend it, buy a car repair insurance from your insurer (if it is provided) or accept that you will pay for such issues out of pocket as and when they happen.
How Does Mechanical Breakdown Insurance (MBI) Work?
It is an add on benefit on top of a standard policy. You pay one premium. It pays for repairs that were due to malfunction rather than any insured perils like collision, fire or flood damage. Generally, all parts and labor are included. Normal wear and tear that needs to be handled in a maintenance service like brakes, filters, brake-pads, wipers and tires aren’t included.
However, there are several points to know before considering it. First of all, not all auto insurers offer it and therefore, you may need to switch to get it. This may not be an issue if you are arranging the first plan or you wouldn’t mind it anyway. GEICO, AAA, Mercury, American Family, Progressive and Allstate are some of the companies that offer this product. Some credit unions offer it as well.
Secondly, repair insurance is usually sold for nearly-new cars. So, you may have to start early. Then, it can be renewed for a long time once it is bought. Knowing most new vehicles come with a warranty, most people wouldn’t consider a second protection and it really doesn’t make sense. By the time you want it you may have missed the boat already. So, it is more likely that it may come up when purchasing a nearly new used car as an alternative to extended warranty.
For example, GEICO offers MBI for vehicles that are less than 15 months old and with less than 15,000 miles. However, it can be renewed up to 7 years or 100,000 miles (whichever comes first).
It is essentially an incredible marketing tactic that hooks you up for that period once you are in. And all the while they get paid. Let’s consider what could possibly happen. Firstly, vehicle repairs usually don’t come in one big blow and most engines are run down to the ground before they blow up.
Secondly, there is a deductible and it is usually $250. Now, you can see the possible pattern that may play out. You keep having these issues every couple of years for a few hundred dollars each and you could keep paying them out of pocket, all the while never having anything big enough to bother with a claim. Let’s assume you had one big claim in 7 years for $2,000. That is a $1,750 pay out (minus deductible) and by now you have probably paid this amount in premiums already.
Most fresh out of factory and relatively new cars with low mileage come with a manufacturer’s warranty automatically. There are two types and they are;
Bumper-to-Bumper Warranty: Funny enough it doesn’t actually include the bumpers but most part and system failures in between are covered, unless specifically excluded.
Powertrain Warranty: This only covers the essential parts that makes a vehicle move like engine, transmission and drive axles. Unlike the former, this only lists the things it pays to get repaired or replaced and not what it doesn’t.
Both types of warranties can be extended beyond the initial period for an additional fee, which is based on age or mileage (whichever comes first). These periods and limits can vary widely. For example, it could be extended for another 3 years or 30,000 miles. Usually, it is extended for the same period and mileage as the original.
Extended Warranty vs. Mechanical Breakdown Insurance
These are similar in provisions, periods, limitations and costs. Therefore, you just need one of them, if you think it is a good idea and both are available options. It is fair to say that MBI is often a cheaper alternative with broader provisions. Here are the key differences;
|Mechanical Breakdown Insurance||Extended Auto Warranty|
Optional insurance policy add-on
Optional vehicle service contract
|Offered by insurers||Offered by dealers and third parties|
|High-end cars may be refused||Available for most types of cars|
|Coverage up to 100,000 miles||Coverage up to 300,000 miles|
|Costs around $150 per year||Costs around $3,000 per term|
|Pay monthly or yearly premiums||Pay upfront or finance|
|Renewable each year||Plans for up to 10 years|
|Higher deductibles||Lower Deductibles|
|Minor repairs may be an issue||Includes minor repairs|
|Free to choose mechanic||Dealer chosen mechanic|
|Claims are seen by the insurer||Separate from insurance claims|
|Available nationwide||Not available in California|
You can add as much as you want to a policy but you need to consider if it is worth the additional costs. Also, in case of MBI a claim will go on your policy. It is not clear how much it will affect your next premium. Probably, the first one will not affect at all. But how about several claims on MBI and regular insurance? It wouldn’t be a surprise if the company increases the premiums a bit.