Just Say No

I find most extended warranties:

• ...are too expensive. At 20% or more of a product's price for a short coverage period, usually one year -- not worth it.
• ...cover the wrong thing. Extended warranties cover internal breakage, but what about the external bezel or jack? What about the coffee spill? What about phone support, which most of us need more than "break/fix" service?"
• ...just plain aren't necessary. Today's electronics and many other products have become simpler and more reliable, most with failure rates of less than 5%, many less than 1%. Chances of a failure -- a covered failure -- are predictably low (which explains the profitability.) Also, products come with a warranty, so check the length of that warranty and check on the availability of tech support on a per-incident basis.

Granted, in avoiding the warranty, you're exposing yourself to some risk. But unlike catastrophic health problems, the risk is easy to manage. Here are some strategies:

• Say no, take the chance. We're talking about a $200 iPod. Not the end of the world if you have to replace it.
• Put money into a repair fund. The 20% of the purchase price you might spend could be saved -- in your own "insurance" or "rainy day" fund. Accumulate these savings across several purchases, and you'll cover most risks (and earn some interest)!
• Use the right credit card. Many credit cards, especially the platinum or gold variety, provide some coverage. Check for details.
• Develop a backup plan. Visualize what you would do if your product did break prematurely. By then, it might be time to buy the latest technology, anyway; the price will have come down -- laptops, for example. Or make a commitment to replace with lower tech (a 4gb iPod to replace the 30gb iPod lost). Or buy a replacement on eBay. It will get cheaper, and lots of used copies should become available.

All said, here are a few places where extended warranties might make sense:

• Cell phones. These gadgets are used hard, and many warranties cover loss or accidental damage. While cell-phone warranties sound attractive, be aware of the terms and replacement costs. I've lost three phones and reached my replacement limit under the insurance I bought. Still, I usually had to pay some fee for the phone. Later, I found that I could get a replacement phone for $30 to $50 even without the insurance, so long as a "special" was going on with a phone.
• Tech support. Warranties covering phone or online tech support can be valuable, especially for the nongeeks among us. A recent Consumer Reports release recommends buying extended warranties on Apple computers because their tech support lasts only 90 days. (Incidentally, the only other product category getting their "thumbs up" was projection TVs because of high failure rates. Best advice: Don't buy one.)
• Accidental damage. For laptop computers and sensitive LCD-screen TVs, accidental-damage coverage may be a good idea, especially if you're a high-risk user susceptible to spills and drops. For example, accidental coverage can be had on a laptop by HP for $100 for a year.

Extended warranty providers don't structure their pricing to account for adverse selection -- that is, the principle that the people who need insurance most buy it. There's one price, no matter who you are (or who your kids are). So if you're among those who need insurance the most, extended warranties might make sense.

Otherwise, just say no.