Mechanical Breakdown Insurance: When It Is Worth Buying

Mechanical breakdown insurance can earn its keep when your car has outgrown its factory warranty and an unexpected repair bill would be hard to absorb. It is not a good buy by default, though. A standard auto policy will never pay to replace a failed transmission or a dead engine, so the decision is really a three-way one: a mechanical breakdown policy, a service contract from a dealer, or a repair fund you build yourself. Which option wins depends on what each one covers, what it leaves out, and how much of the protection you would be paying for twice.

What mechanical breakdown insurance is

Mechanical breakdown insurance, usually called MBI, is a genuine insurance policy that pays to repair covered mechanical failures. That sets it apart from the coverages already on your policy. The Texas Department of Insurance explains that collision pays to repair or replace your car after an accident, while comprehensive pays when the car is stolen or damaged by fire, flood, vandalism, or another non-collision event. If a component simply gives out on its own, neither coverage responds. MBI is built to cover that specific gap.

Because MBI is insurance rather than a contract, it is sold and supervised differently from the protection plans offered at a dealership's finance desk. According to the California Department of Insurance, MBI can be sold by banks, credit unions, and insurance agents, as well as directly by insurance companies. In California, the price of an MBI policy is regulated by the state insurance department, while the price of a vehicle service contract is not. New York's insurance regulator has also confirmed that insurers may issue stand-alone policies covering mechanical breakdown. Details differ from state to state, but the underlying structure is the same everywhere: MBI is a promise made by an insurer and backed by insurance regulation.

MBI compared with an extended warranty or service contract

Most products marketed as extended warranties are actually service contracts, not insurance. The Federal Trade Commission describes auto service contracts as optional agreements sold by vehicle manufacturers, dealers, or independent companies, and points out that many dealer-sold contracts are run by independent companies called administrators, which decide whether a claim gets paid. With MBI, the insurer is the obligor, meaning the party legally responsible for paying covered repairs. For a fuller side-by-side look, see the guide on mechanical breakdown coverage versus an extended warranty.

What a product excludes matters more than what it is called. The FTC warns that service contracts generally do not cover accident damage or normal wear and tear, and that a contract limited to mechanical breakdowns may not pay for problems caused by wear. California's insurance regulator offers the same caution about MBI: before you buy, check whether repairs due to wear and tear are covered or excluded. On an older car, wear is exactly what tends to fail, so a policy that excludes it may pay for far less than you assume.

When MBI tends to pay off, and when it does not

The strongest case for MBI is a vehicle that is past its factory warranty, that you intend to keep for several more years, and whose probable repairs would be costly enough to hurt. A modern drivetrain or electronics failure can easily run into four figures, and MBI trades that uncertain large expense for a predictable premium. The weakest case is a car still protected by the manufacturer's warranty. The FTC specifically recommends comparing any protection product with the warranty that came with the car, because coverage that begins before the factory warranty ends is duplicate protection you are paying for.

MBI also stops making sense when the exclusions hollow it out. A policy that excludes wear and tear, caps payouts below what repairs really cost, or forces you to use particular shops can leave you paying premiums for coverage you rarely get to use. Keep in mind that self-insuring is a legitimate alternative. Money you set aside each month for repairs remains yours if nothing breaks, while a premium is gone either way.

How to evaluate a policy before you buy

• Measure any MBI policy or service contract against the warranty coverage you already have, so you are not paying twice for the same protection.
• Read the exclusions before anything else, especially how the policy treats wear and tear, pre-existing conditions, and high-mileage vehicles.
• Check with your state insurance department that both the seller and the company standing behind the product are licensed before you hand over any money.
• Price the coverage before you visit a dealership, so the finance-office pitch has genuine competition.
• Weigh coverages and exclusions, not just the price. The cheapest plan that never pays out is the most expensive option you could choose.

The bottom line

Mechanical breakdown insurance deserves a look once the factory warranty has expired, particularly on a car you plan to keep for a while, but only after you have read what it leaves out. If the policy truly covers the failures your car is likely to experience, it buys real peace of mind. If wear and tear is excluded or the factory warranty is still in force, you are usually better off directing the premium into a repair fund.

Not sure whether MBI fits your situation? Lanewise Auto offers plain-English guidance on coverage questions like this one. Tell us what you want help with and we will walk you through it. Nothing to buy, no obligation.