Retailers may push hard to get you to buy these plans because they're cash cows for them. Stores keep 50 percent or more of what they charge for these contracts. That's much more than they can make selling products.
In our latest survey on electronics buying, seventy-three percent of in-store shoppers said that sales staff had pitched them the idea of buying a service plan. Perhaps that explains why in-store electronics shoppers were somewhat more likely than online shoppers to buy a plan (15 percent vs. 8 percent). Overall, the median price paid for a plan was $75 in-store and $65 online.
Our survey results were similar for those who bought major appliances. Eighty-five percent said their checkout didn't conclude without at least a suggestion that they purchase a service plan. At some stores, shoppers felt "strongly urged" to spring for the extra coverage. The median price paid for a plan was $118 for a major appliance and $37 for a small appliance.
There are many reasons why we recommend against buying service plans:
Repairs may be covered by the manufacturer's warranty. Although manufacturers' written, or "express," warranties often don't last as long as they used to, there's a good chance your product is covered for at least 90 days or longer. Buying a service plan may not only duplicate coverage you already have, but it sends manufacturers a message that limiting their express warranties will increase the sale of service plans. You shouldn't have to pay extra to get manufacturers or retailers to stand behind their products.
Products seldom break within the service plan window. Our data show that products usually don't break during the two-to-three-year period after the manufacturer's warranty expires and the service plan is in effect.
Repairs aren't that costly. When electronics and appliances do break, the repairs, on average, cost not much more on average than a service plan. The median difference in our latest survey was $16.
Manufacturers sometimes cover out-of-warranty items. If a product breaks down in an unreasonably short time or if there's a known problem affecting many customers, manufacturers often will help by replacing the item free or at low cost or by providing free or discount parts or repairs. So contact the manufacturer and ask for help. If necessary, appeal all the way to the executive office.
Your credit card may have you covered. Many credit cards automatically extend the manufacturer's warranty up to a year or so on many products purchased entirely with the card. The coverage is free.
You may have other warranty rights. As a result of state laws, most products automatically come with an unwritten "implied warranty of merchantability," which means the items must function as a person reasonably would expect, be free of substantial defects, and last a reasonable amount of time (although the duration of the implied warranty usually is no more than four years). If a product can't meet these requirements, you may have a right to pursue the retailer and/or manufacturer legally. An exception is allowed for items that were sold using such terms as "as-is," which unfortunately is the case for much of what's being sold online, based on the fine print we've read on many retail websites. But about a dozen states (Connecticut, Kansas, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Hampshire, Vermont, Washington, and West Virginia) and Washington, D.C., prohibit such exceptions; so you're covered no matter what.
Insurance may cover you. Plans that cover you if an item is stolen, destroyed in a fire or other major event, or vandalized may only duplicate coverage you have under your homeowner's or rental insurance policy. But check your policy deductibles. Homeowner policies generally to not cover items that you break, for example by dropping them.
The plan may let you down. Service plans typically have many fine-print exceptions that a provider can use to deny your claim. Among survey respondents whose repairs were covered by warranties, 62 percent were highly satisfied and 19 percent were dissatisfied with their repair. Those numbers are similar to the percentages found for those who paid for repairs out of pocket. Notably, repairs covered by warranties had slightly more problems than repairs covered out of pocket. And they were:
More likely to have taken at least two weeks (23 percent compared with 15 percent for out-of-pocket repairs).
More likely to have resulted in a repair not done correctly the first time (22 percent compared with 12 percent for out-of-pocket repairs).
Automotive service plans sold by third-party companies, instead of by car manufacturers, have been a particular problem. There have been many complaints from customers who say the providers often refuse to pay claims, often saying the problem isn't covered. In 2011, the St. Louis-based Better Business Bureau issued a critical report of the industry.
You can't afford to protect everything. Even if the plans were worth every penny, it's simply not cost-effective to buy a plan to cover every major purchase in your life. While a service plan may leave you coming out ahead once in a while, overall you'll probably save money by avoiding plans and seeking other ways of tackling broken or defective products.
Self-insure. Save the money you'd otherwise spend on service plans. Place it in a savings account, where you've socked away six months to a year of living expenses, or put it in a designated product repair/replacement fund. Then, when a product breaks, you'll have the money to repair or replace it. Of course, you first should try your other options, such as contacting the manufacturer or retailer if you think the problem was the result of a defect, or using coverage you may have from your credit card. Another benefit is that the money you've set aside will be available if you need it for some other reason, such as paying your living expenses if you lose your job.
Buy reliable products. The more reliable the product, the less likely it will be that you'll have to fix or replace it prematurely. Brand-reliability information for major products we test is available to ConsumerReports.org subscribers. Also, check out user reviews on this website and by using a general web search with the product name and/or model number and the word "reviews."
Read the manufacturer's warranty before buying. Under federal law, a seller is required to show you the warranty before you make a purchase. If you find the warranty inadequate, consider another product or manufacturer.
Examine the retailer's return policy. Some online retailers say that your only recourse if they sell you a defective product is to deal with the manufacturer. Some others say that you can return a defective item, but only for a limited period or while the standard return policy is in effect. If you run into this, consider shopping elsewhere. A retailer should never disclaim responsibility after taking your money and selling you junk. You're entitled to get what you paid for.