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The Basics

When extended warranties make sense

Depending on your circumstances, paying extra to lengthen a warranty on an electronics purchase could be a smart option -- or a waste of money.

By SmartMoney

When you're shelling out $3,000 for a 50-inch flat-screen TV, it's nerve-racking to hear a salesperson explain what could go wrong if you pass up the offer to buy an extended warranty.

What if the TV falls from its wall mount? What if the pixels get damaged? For the most part, those fears are unwarranted.

"You're betting on a series of events that are possible but not likely," says Tod Marks, a senior editor for Consumer Reports.

After all, what are the chances that your device will break after the manufacturer's warranty expires but while it's still covered by the extended warranty? And will the repairs actually be more expensive than the money you spent on those three extra years of coverage? "Let's just say the moons have to be perfectly aligned," Marks says. (Click here for details about just how unlikely that is.)

"The numbers game is stacked solidly in the retailers' favor," says David Carnoy, the executive editor of electronics review site CNET. Shoppers pay roughly one-third of the item's price for a two-year warranty extension. Of that, retailers pocket about 80% as profit merely because consumers are often unlikely to use their warranty or need a costly repair during the coverage period. That's one reason store employees are so quick to push extended warranties and service plans for everything from flat-screen TVs to microwaves.

However, there are a few exceptions to the warranties-aren't-worth-it rule. Just don't expect blanket recommendations (i.e., always buy for iPods, never for refrigerators). The choice to buy or not to buy is entirely situational.

If you and your purchase fit several conditions, an extended warranty or service plan may be worth a hard second look:

If you are . . .

Not tech-savvy. Because extended warranties often include tech support, they can be cost-effective for consumers who need a lot of handholding, Carnoy says.

Apple's MacBook laptops, for example, come with just 90 days of tech support. Thereafter, each call costs $49. But pay $249 for a three-year AppleCare Protection Plan, and you've recouped the cost after just five calls, necessary repairs notwithstanding.

Clumsy. One slip of the hand or careless swing of the knapsack can wreak havoc on a fragile gadget. That damage isn't usually covered by a manufacturer's warranty, warns Jerry Grossman, the editorial director for tech-education site DemystifyingDigital.com.

Some extended warranties tend to forgive you for such accidents, though, as well as even loss or theft. You'd pay $5.99 per month for handset insurance on your T-Mobile Sidekick LX, plus a $110 deductible to replace the $400 phone. So if you damage it to the point that it needs to be replaced within the first four years of ownership, you could come out ahead.

Using the item heavily. Someone who cooks as if every day is Thanksgiving -- with all four burners and the oven on simultaneously for hours -- is going to inflict more wear and tear on his or her stove than a consumer who prefers takeout.

So if you know that you're going to be using an appliance or gadget to its full capacity and on an almost daily basis, odds are good that it will require repairs during the extended-warranty period, says Dale Haines, a senior director at J.D. Power and Associates.

If your gadget is . . .

Cutting edge. "If it's something that's not tried and true, an extended warranty may be worth it," says Carolyn Forte, the home-care director for the Good Housekeeping Institute. Without a long-term record of reliability, it's tough to say what problems will pop up with your cool new gadget and when those issues might occur.

Take Microsoft's Xbox 360, which sold out nationwide within two hours of its November 2005 release. Service problems have since plagued the console, including a hardware failure gamers have nicknamed the "red ring of death" and an August 2006 software update that rendered some consoles useless.

The initial warranty period: just 90 days, with repairs thereafter costing $140 each, roughly one-third the initial $400 console price. A two-year extended warranty from Microsoft would have cost $60. (Microsoft is the publisher of MSN Money.)

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The problems were so widespread that in December 2006, Microsoft extended the manufacturer's warranty to one year, and then, last July, extended it again to three years, pledging to reimburse consumers for their repair bills. But that kind of bailout is rare. For early adopters, it's better to be safe than sorry.

Refurbished. If you're buying a refurbished item, floor model or open-box unit, the terms of the initial warranty you get with the product can be far from adequate, says Tom Spring, a senior writer for PC World magazine. Olympus, for example, offers a one-year warranty on most new cameras, binoculars and other products. However, refurbished models are covered for just 90 days.

Continued: Not all warranties are equal

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