Picture yourself at the cash register at Best Buy, about to plunk down the plastic for a flat-screen television, when the salesperson asks if you want what amounts to an extended warranty.
It's a tough question to answer and one that many of us hear often. You have little time to make a decision. And you may be reluctant to spend another couple of hundred dollars on an already pricey item for insurance you hope you'll never need. But you also worry that if it breaks, it could cost you even more to fix or replace it.
Whether you're purchasing a television or a washing machine, you often have the option of buying an extended warranty, which often are called service or protection plans. It typically covers the product if it breaks or stops working within a certain time frame. However, not all warranties are equal, and experts say that some are a fool's bet.
According to those who study extended warranties, a general rule of thumb is that the policy should cost between 10 percent and 20 percent of the purchase price. Also, the best warranties include accidental damage - as when you spill milk on the keyboard of your laptop and ruin it. Those plans typically cost more. And consumers should ask whether the retailer selling the warranty plans to fix the product in-house, provide you with a new one or ship it away for repairs.
"It's a contract, and like any contract you need to read it and ask what it means," said Eric Arnum, editor of Forest Hills, N.Y.-based Warranty Week. "It is a real pressure situation when you're in line and there's people behind you and you're saying you'd like to read it first and everyone starts to grumble. Believe me, that is not accidental."
Warranties are a big business. Americans spend about $15 billion on extended-service warranties annually, according to Arnum.
The Federal Trade Commission, which points out that extended warranties are really service contracts, said consumers should weigh whether they're needed when compared with the manufacturer's warranty that is built into the price of the product.
Companies such as Best Buy say their service plans are popular among consumers who want protection beyond the manufacturer's standard coverage. And New Customer Service Cos., an extended-warranty provider based in Sterling, Va. that works with retailers, said the plans are good for consumers who want the convenience of dealing with one merchant.
Best Buy Co. executives say many consumers just want to know that they can return the product to the store where they bought it for a repair instead of shipping it away for weeks at a time.
"Ultimately it's up to the customers who want that additional peace of mind and the security and convenience that the product will be covered above and beyond what the manufacturer might cover," said Justin Barber, a Best Buy spokesman.
Consumer Reports advises people in general not to purchase warranties, though it does make exceptions for certain products.
The magazine, which studies various products and services, argues that most consumers aren't likely to get their money's worth beyond what a manufacturer's warranty provides. "For the vast majority of products, the extended warranty doesn't pay," said Tod Marks, a senior editor at the magazine.
Warranty experts say customers should factor in more than price when making a choice.
Arnum, of Warranty Week, says warranties are less important when shopping trusted brands, especially with big-ticket items such as washing machines and televisions.
Established brands such as Whirlpool have a track record in terms of performance and customer service, he said. They are also more likely to take care of repairs and will have spare parts to fix what is broken. Unfamiliar brands may be new to the market and still working out the bugs. Arnum recommends buying an extended warranty in those cases.
Some experts also say warranties for new technology are a good idea. Even Consumer Reports believes consumers should consider the warranties for Apple computers, in part because the company charges $49 "per incident" for telephone support after 90 days. A three-year warranty for the MacBook is $249, according to Apple's Web site.
Arnum of Warranty Week, who recommends warranties for most new technology, points to Microsoft's Xbox 360, which the company said experienced an "unacceptable number of repairs" after the entertainment system was introduced a few years ago. Microsoft voluntarily extended the manufacturer's warranty to three years as a result, and took a charge of more than $1 billion during a single quarter last year to cover it.
Consumers buying service contracts should understand what protection the manufacturer offers and whether anything else is needed, according to the FTC. For example, if the manufacturer's warranty covers the first year, Arnum said, you are paying for a three-year extended warranty that is only good for two years.
Also, some credit card plans cover repairs, so check with your company before buying more coverage.
Arnum said he would spend more than 20 percent of a purchase price on an extended warranty for a laptop because of the wear and tear they take. But, he says, make sure the warranty has "accidental damage protection," even if it costs more to add it to the policy. That would cover damage from dropping it or other mishaps.
Eric Lebron, who runs Computer Handyman of Maryland, agrees. He runs a business that repairs computer hardware and software.
"The key thing to remember is to make sure you get the accidental damage or else it is not really worth getting," Lebron said. "If you crack the screen, I really can't help you. I'd be the first to say you have to call the manufacturer and send it in."
Marks of Consumer Reports said consumers should avoid extended warranties for coffeemakers, toaster ovens and microwaves because they are relatively inexpensive items that can easily be replaced. Some stores offer replacement warranties for small products - such as an iPod - if they break.
Knowing who will handle the repair under a warranty is another important question consumers should ask.
Often, a warranty company contracts with a retailer to sell the service and then handles the repair, Arnum said. An insurance company underwrites the warranty.
Retailers such as Best Buy repair most of the products they sell in-house and will provide house calls for larger products such as televisions.
The warranty could require that you ship the product to be fixed, and on your own dime. Shipping costs for a flat-screen television could be higher than for the warranty itself. Even if the warranty says it will cover your claim, Arnum warns that companies may still deny it. He noted one instance where a woman bought a warranty with her new sofa that said it would cover "a stain." The company denied her claim because she called about two stains.
"It's a tough decision because four out of five are wasting their money but one out of five are hitting the jackpot," Arnum said. "Which one are you?"
Extended warranty advice
Don't pay more than 10 percent to 20 percent of the price of the product.
Consider buying accidental damage insurance for products such as laptops. It can be costly, up to 30 percent of the product price.
Find out where the product would be repaired.
For larger devices such as big-screen televisions, find out whether the warranty provides house calls.
Consider whether the manufacturer's warranty already covers the repairs and the time period being offered under a service contract.
Products that experts recommend purchasing extended warranties for:
Rear projection televisions
[Sources: Consumer Reports, Warranty Week, Federal Trade Commission and interviews]