Car repair insurance: an extra policy that you might need

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Want to keep costly auto repairs from breaking your budget after your manufacturer’s warranty expires? One option may be mechanical breakdown insurance, or MBI, a little-known insurance product that acts like an extended warranty on new and used vehicles but with several advantages, including payment terms, that may make it a good choice for some.

Unlike a manufacturer or dealer warranty, MBI is an insurance contract between the car owner and the insurance company, overseen by state regulators and backed by state insurance guarantee funds. Think of it as auto repair insurance. Policies are available through licensed property and casualty insurance agents, credit unions, finance companies and online.

MBI isn’t new, but it has gained traction during the recession as drivers keep their vehicles longer between purchases.

“We’re getting more and more requests for it,” says Michael Randles, president of Insurance Center Associates of San Pedro, Calif., which sells several MBI products. “I think people want to insulate themselves against future problems. They aren’t getting a new car every two or three years now, and because of that, they want to get a five- or six-year, 100,000-mile policy.”

A vehicle must meet certain conditions to qualify for MBI. For instance, Geico offers MBI only to its auto insurance customers, and only if the vehicle is less than 15 months old with fewer than 15,000 miles and the owner is the first title holder. Customers pay a flat $250 deductible, can renew MBI coverage for seven years or 100,000 miles, whichever comes first, and the policy is not transferable.

On the other hand, Mercury Insurance Group offers MBI on new (seven years, 100,000 miles) and used vehicles (five years, 100,000 miles) to all drivers, with deductibles as low as $25, and the policy is transferrable.

While MBI policies vary widely in price and terms, some advantages over extended warranties may include:

Broader coverage: MBI typically offers bumper-to-bumper repair coverage except for maintenance and normal wear and tear. A manufacturer’s extended warranty may be limited to certain systems, such as the drive train.

Payment plan: An MBI policy may offer a periodic payment plan similar to your auto insurance; it may even be included in your auto premium if it’s written through your insurer. Warranties usually involve an upfront fee included in the purchase of a new or used car. If the MBI fee is included in the vehicle financing, you could be paying interest on it. A pay-as-you-go MBI policy also may allow you to drop coverage at any time.

No in-house requirement: Manufacturer and dealer warranties typically require that repairs be performed in-house or at an authorized facility. MBI policies typically allow you to choose your repair shop, which comes in especially handy for out-of-town breakdowns.

Transferable: MBI policies may be transferable; dealer warranties often are not.

Less risky than dealer warranties: In most cases, a dealer warranty is only as good as the dealership behind it. “With insurance, you have an agent and the state on your side,” Randles says. “If it’s not an auto manufacturer and it’s not an insurance company, stay away. If a dealer or dealership group goes out of business, you’re stuck.”

Randles says cost is another reason to purchase MBI from an insurance agent instead of a dealer. “We both get paid a commission, but it’s a point of profit for them. If this policy is $1,000, they might charge you $2,000 or $3,000 for it,” he says.

On the other hand, some insurers such as Mercury will give you the less-expensive, new-car rate if you purchase MBI 30 days before your warranty expires.

Jack Gillis, director of public affairs at the Consumer Federation of America and author of “The Car Book,” calls MBI a statistical sucker’s bet.

“Most consumers won’t ever need to use it,” he says. “Many, many warranties today last five years, which is longer than most people keep their cars. A lot of these extended service contracts are duplicative of what is covered by your warranty, and they happen to be one of the most profitable after-market items that dealers sell.”

His advice? “Put that same money in a savings account and in the event that you have a catastrophic repair that isn’t covered by your warranty, then you’ve got it to draw on. Statistically speaking, you’ll really be building up your down payment for your next car.”

But Randles, for one, is glad he had a Mercury MBI policy on his 2005 Ford Explorer when its transmission hit the skids 18 months ago. Cost to Mercury: $5,600. Cost to Randles: a $50 deductible plus transmission fluid.

“It was huge,” he says. “I was counting my lucky stars that I had the coverage.”