Thinking about an extended warranty? Read this

It’s the holiday shopping advice you hear every year at this time: Skip the extended warranties. Consumer advocates have repeated this mantra for decades.

“They’re basically a waste of money,” said Anthony Giorgianni, an associate editor at Consumer Reports. “If you get an extended warranty on everything you buy, you’ll go broke trying to protect yourself from something that is unlikely to happen.”

The companies that sell these service contracts say the magazine’s advice is outdated.

“We disagree with this position completely,” said Terry Hawkins, president of theGlobal Warranty and Service Contract Association. “You do get good value for your money. This is about convenience and peace of mind, and that’s what the editors atConsumer Reports miss.”

Source: SquareTrade

Source: SquareTrade

(Read moreConsumers have had enough, ‘rage survey’ says)

Consumer Reports gives three main reasons for calling extended warranties “notoriously bad deals” that are best avoided. Based on its annual survey of subscribers, it found that:

  • The vast majority of repairs are made while the product is still covered by the standard manufacturer’s warranty.
  • Products seldom break between the end of the manufacturer’s warranty and when the service plan runs out two to three years later.
  • When electronics and appliances do break, the average repairs don’t cost much more than the price of the extended warranty.

They’ve gotten better

Today’s service plans are significantly better than those sold 10 or 15 years ago. Most states now require these contracts to have standard provisions and disclosures.

“That legislation, which we supported, has chased a lot of the bad actors out of our industry and has left a strong, vibrant group,” said Tim Meenan, executive director of the Service Contract Industry Council.

Most service contracts now offer a 30-day “free look” period. This gives you time to study the terms and conditions and cancel, if you want, and get a full refund. You should also be able to cancel at any time during the contract and get a prorated refund.

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Many service contracts also cover mobile devices for accidental damage, something not covered by the typical manufacturer’s warranty.

“I think it has changed people’s minds about whether they should buy one or not,” said Ty Shay, chief marketing officer at SquareTrade, one of the big players in the extended warranty market. “Our research indicates that 1 in 3 people will damage their smartphone within the first 12 months of owning it. In most cases, that failure will be from dropping, crushing, falling into a swimming pool or some other mishap.”

For Tony Weiss, an entrepreneur in Frisco, Texas, it was a “silly mistake” in the bathroom. He was texting on his new iPhone 5s, when it slipped out of his hands and into the toilet.

Weiss, who uses his phone for business, could not wait for a repair. He needed a new one right away. SquareTrade told him to go to the Apple store, buy a new phone and send them the receipt. The reimbursement was in his PayPal account within a half-hour of doing that.

“I got the same phone that I had destroyed, no questions asked,” Weiss told me. “Literally, within an hour, I had a new iPhone in my hands. I was very pleased with the experience. They treated me great.”

Weiss told me he feels the $99 he paid for the two-year coverage was a fair price. Even after paying the $99 deductible, it saved him about $600 on that new phone.

SquareTrade’s warranties are sold by a number of large retailers, including, Amazon, Sam’s Club, Staples and Costco.

In fact, it’s the first service contract Costco has ever offered. Steve Messmer, Costco’s assistant general merchandise manager, told me corporate executives had been turned off by the industry’s “overall bad reputation” for inflated prices and problems with taking care of customers when a product broke.

“SquareTrade has been a real good program for us,” Messmer said. “We’ve had 35,000 claims filed so far and only one or two complaints.”

Do your homework

Don’t let anyone pressure you into buying an extended warranty. You don’t have to buy one on the spot. You don’t even have to buy it from that store.

Shop around. Check out your options. Make sure this is right for you and that you really can afford it. You also want to know:

  • Who is providing the coverage and how do they rate with customers?
  • Is there a deductible and how much is it?
  • Does this policy cover accidental damage (important with mobile devices) and if so, does that cost more?
  • Do they replace if they can’t repair quickly? And is that a new item or a refurbished model?
  • Is there 24/7 customer support?
  • Does the plan cover routine maintenance, such as cleanings and tune-ups?
  • Will a large appliance be fixed in your home, if you request it?
  • Can the plan be transferred if you give the item to someone else?

Make sure you have a 30-day free trial period and that the contract can be canceled at any time for any reason with a prorated refund.

My 2 cents

I understand why consumer advocates give a thumbs-down to extended warranties. I also see why some people might want to buy this extra protection for certain products, such as expensive mobile devices—but only if the plan covers accidental damage. 

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Personally, I tend to say no to most extended warranties. I use a credit card that doubles the manufacturer’s warranty for up to an additional year. The card also protects me against theft and damage, up to $10,000 per claim.

After that, I’m willing to take my chances.

I do worry that some people are buying too many of these extended warranties. Sometimes things break and you have to pay to fix them. That’s life. We can’t buy our way out of that.

—By CNBC contributor Herb Weisbaum. Follow him on Facebook and Twitter @TheConsumerman or visit The ConsumerMan website.

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