Purchase protection. Service contracts. AppleCare.
Whatever retailers call them, these plans are usually bad buys.

Buy a Samsung TV from BestBuy.com for $599, and at checkout the website recommends “Protect Your TV” with a $69.99 two-year plan from Geek Squad or a five-year one for $129.99.

Shell out $699 for an iPhone 11 from the Apple store and it offers its popular AppleCare for $149 to cover hardware breakdowns and accidental damage; for an extra $100, the plan will also replace the device if it’s lost or stolen.

Put a desk chair selling for $99.75 into your Amazon shopping cart and it pitches a five-year “Protection Plan” for $13.99 that promises to fix accidental damage.

Home Depot’s best-selling Weber grill runs $529; purchase it on the web, and the retailer pushes “Let’s Protect This” for an extra $100 for a three-year extended warranty.

Shop for a phone, TV, computer, tablet, sofa, appliance, vacuum, grill, or dozens of other types of products and you’ll likely get urged to shell out for a “protection plan” (also called an “extended warranty”).

These policies are fantastic sources of easy revenue for the retailers that hawk them and for the insurance companies that administer them and honor infrequent claims. But they are usually bad deals for you.

Stores typically keep 50–70 percent of the cost of warranties they sell, a profit margin that’s far better than for most products they offer. Some retailers count on service-contract sales for most—or even all—of their profits.

Retailers rarely disclose their warranty profits. In its financial filings, Apple lumps revenue from AppleCare into a catchall “Services” category; CNBC estimated its revenue from AppleCare exceeds $1 billion per year.

In 2005—the last year for which Best Buy itemized profit centers in its SEC filings—about one-third of its profits came from warranty sales. Now, most analysts estimate that half (or perhaps even all) of Best Buy’s profit comes from extended warranties. That means it and some other retailers work under bizarre business plans of selling merch for little or no profit so they can make a mint from selling nearly worthless protection plans.

After retailers take their big cuts, the rest of the money spent on these warranties goes to insurance companies that underwrite coverage. (AIG, the largest warranty seller in the U.S., partners with Apple, Best Buy, and several other large retailers.) These plans are incredibly profitable for them, too: Many analysts estimate that less than 20 cents of every dollar spent on extended warranties gets paid out in claims.

To sell these plans, retailers prey on our “loss-aversion” tendencies. Most consumers would much rather avoid losing something than paying the same price to replace it: For some reason, losing a $100 bill feels far more painful than buying something for $100.

By offering a way to minimize the risks of a bad buy, or to reimburse us for a broken gadget, retailers make customers feel better about shelling out hundreds or thousands of dollars. During online or in-store checkout, many sellers ratchet up the drama: For laptop purchases, Dell’s website wants you to “Protect it. You do everything on your PC, so keep it safe by upgrading your support plan. You’ll prevent costly damage and downtime.”

Checkbook often evaluates such “peace of mind” policies—home warranties, travel insurance, rental car coverage, utility-line warranties, and so on. We consistently find these plans make sellers a lot of moolah, but don’t provide much value to consumers.

Extended warranties are insurance policies. While you should buy insurance to protect against risks that could be financially catastrophic—house fires, liability claims, auto accidents, medical care—you shouldn’t bother paying to cover the risk of paying for repairs or to replace electronics or office chairs.

Yes, it would be financially painful to replace, say, a $699 iPhone. Because they are used often and therefore subject to accidents (darn kids!!) or being misplaced (darn memory!!), paying more to eliminate the financial pain from those risks seems reasonable.

But the math for most protection plans doesn’t add up to “reasonable.” For example, buy an iPhone 11, and for no extra cost you get a one-year limited manufacturer’s warranty covering repairs and 90 days of tech support. Pay an extra $149 for AppleCare, and it extends that warranty for another two years; spend another $100 and you’ll get coverage for theft or loss.

The problem? Even after paying those premiums, you’ll still have to pay extra if there’s a problem. Cracked screen? There’s a $29 deductible to fix it under AppleCare; you’ll pay $99 if your clumsiness or a product defect necessitates a different type of fix. And if you bought Apple’s full-boat policy covering theft and loss, you’ll still shell out a $229 deductible to replace a lost phone.

So you’re out $699 for the phone, plus $149–$249 for AppleCare, then up to another $99 if you break it or $229 to replace it. That means if something goes wrong you could be out of pocket $248–$478 to cover a $699 purchase.

Warnings from retailers about possible expensive repairs down the road make less sense when you consider that many products are very reliable. And those that do break down—especially electronics—are likely to do so right away, while still covered by the manufacturer’s warranty.

Even if you need a repair, its costs are often comparable to the price of the protection plan itself. Buy a GE clothes dryer from Lowe’s for $719 and it will offer you an extended warranty for $99.97. But that’s just short of the $142 median cost of appliance repairs, according to Consumer Reports. Why spend so much for an insurance policy you likely won’t need to cover a repair you can afford?

Many retailers push extended warranties not just for the easy money. These plans also help foster a sense among their customers that if there’s a defect or breakdown, it’s up to the customer to deal with it. By passing on extended-warranty offers, many consumers will later feel that if they have a problem it’s their fault, since they assumed that risk by not buying the plan. But, as we discuss in the article beginning on page 90, manufacturers and retailers are obligated to warrant that products they sell are free of defects; passing on a protection plan doesn’t change that.

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Knowing all this, if you are still thinking about buying an extended warranty, consider:

Your credit card might provide similar protection for free.

Many credit cards automatically provide free extended warranties when you use them to pay for products that have manufacturer’s warranties (although vehicles and boats are usually excluded).

For example, Citi’s Platinum Select Card will add to any warranty a 24-month plan to cover repairs, plus it will replace items lost or stolen within 90 days of purchase. Reimbursements are capped at $10,000 per item. The American Express Gold Card offers a nearly identical perk, although its repair-or-replace provision lasts for only a year longer than any original warranty.

Check the benefits from your credit card company to see if you get this coverage. Over the last few years, some cards have yanked perks, especially for entry-level cards; in 2018, Discover dropped warranty benefits for all its cards. And read the fine print to check the requirements to file a claim. A common roadblock is that you’ll have to provide full documentation of the purchase, including an original credit card receipt.

That many credit card companies give away this coverage is further evidence that the plans sold by stores aren’t worth much.

Consider buying at Costco.

If you go to Costco to snag a TV, computer, appliance, or some other product backed by manufacturers’ warranties, you automatically get a free one- or two-year extended warranty. If you pay using a Costco-affiliated Citi credit card, after the store’s free warranty extension expires, Citi’s two-year perk kicks in. So if you pay for a TV at Costco with its Citi card, you’ll get a two-to-five-year manufacturer’s warranty, then a free one-year extended plan from Costco, then another two years for free from Citi.

Again: Availability of so much coverage for free indicates the plans sold by retailers aren’t worth much.

Wait to worry about buying an extended warranty.

If you can’t get a free warranty extension, you don’t have to purchase a plan at the time you purchase the product. You can usually add coverage up to 60 days after buying it, and some stores allow you to buy coverage until just before the manufacturer’s warranty expires. So take time to think it over—and to see whether the item is prone to problems.

Shop for the best price.

If you’re going to (in our opinion) waste money on an extended warranty, you may as well waste as little as possible.

You don’t have to buy the store’s plan. Because several companies are happy to sell you warranties for products purchased elsewhere, you can shop for the best price for the product, then shop separately for the best warranty deal. SquareTrade, the largest seller of standalone plans, offers a four-year plan for TVs costing $500–$699 for $64.99; Best Buy’s five-year plan costs $129.99. SquareTrade will cover any smartphone for $8.99/month. You can buy it from SquareTrade’s website or from Costco.

Check what you get.

We waded through several plans’ small print and were surprised to find they offer decent coverage. But before you buy, check for excluded problems and what happens if something can’t be fixed. Some plans promise to replace a product if it can’t be repaired or requires more than four repairs, but the replacement can be a refurbished or rebuilt unit.

The biggest stumbling block: Most plans require an original store receipt to file a claim. And some absurdly require that you provide a copy of the warranty you bought. The 7,400-word Terms and Conditions for the protection plan offered by Amazon for a $99 desk chair states you must provide a copy of the plan purchased, an original dated receipt that clearly indicates purchase of the plan, and proof you still own the product. (Look guys, here’s a photo of me in my broken chair!)

How long does the warranty last?

Many stores advertise the total length of time you get if you buy their coverage, including the manufacturer’s warranty. If the product warranty lasts two years, and the store is selling a one-year extension, it might sell it as “three years of coverage.” That means you’ll pay $100+ to extend warranty coverage for just an extra year.

Does the contract cover in-home service?

You probably won’t want to lug your 75-inch TV across town or keep massive amounts of shipping materials in case you need to ship it somewhere.

Is there a deductible?

As we’ve already mentioned, if you buy AppleCare and need a repair or to replace a lost phone, you’ll still have to pay a deductible for the privilege of a fix or new device. Do the math and you’ll often find your total potential out-of-pocket cost to get a repair doesn’t add up to a sensible arrangement.

What repair companies can you use?

Even if the warranty pays for it, you don’t want to deal with a lousy shop. Unfortunately, many retailers’ warranties lock you in to having repairs done by the seller’s own shop or a designated facility. In many cases, that’s bad news. For example, Best Buy gets some of our lowest ratings for repair services. Ditto Sears and other big chains. Getting repairs done by these services might be a hassle—and might still result in a malfunctioning product. Independent shops tend to score much better.