Know the answers before you buy an extended warranty

Extended warranty or additional protection plans typically extend the time to cover the costs to repair or replace an item for an additional two to five years from the date of purchase. Extended warranties may also cover items that are never covered by the manufacturer such as normal wear, damage caused by a power surge, and additional services such as annual cleaning and preventative maintenance.

A few days ago, I wrote about when to buy an extended warranty. Before you buy an extended warranty, check your credit card to see if it provides a benefit which extends the manufacturer's warranty if you buy an item with that card. Typically these warranty extension benefits are found on gold or platinum cards. This is the MasterCard Extended Warranty benefit and Visa calls its program the Warranty Manager. But if you don't use a credit card, then this is not available. Also, protection plans offered by retailers can sometimes be more comprehensive. So if you have decided to buy extended warranty coverage, here's what you need to consider:

Know what's covered

Nearly half of the consumers surveyed who bought extended warranties did not read the terms before they bought. Things you need to know include what repairs are covered, under what circumstances, and if you have to deliver the product to the retailer or to another location for the repair.

Also, inclusive warranties mean that the extended warranty overlaps the existing manufacturer's warranty. So a three-year extended warranty only gives you two additional years of coverage on top of the existing standard one-year warranty.

Compare cost to repair

Some extended warranties can cost 15 percent or more of the cost of the product which may be more than the cost of a typical repair. In this case, it simply doesn't make financial sense to buy the plan.

Shop around

While there can be differences in the cost of many products from one retailer to the next, competition in stores and online has really narrowed product price variations considerably. But costs for extended warranties can vary significantly. If you are considering buying a protection plan, it can really pay to shop around. An extended warranty on a flat screen TV can cost $100 at one retailer and as little as $29 at another. Walmart's protection plans are often offered with some of the lowest prices. 

Look for extra charges

Make sure you read the details of the warranty. Pay close attention to the terms that spell out what you have to do to get the item repaired or replaced. For example, some extended warranties will require you to ship the item to another location, and you will have to pay the shipping costs.

Finally, many consumer advocates say extended warranties and service contracts are not worth buying. According to Consumers Union, fewer than 20% of products covered by an extended warranty are ever brought in for repair. On personal electronics, most defects are apparent within the first 90 days while the original warranty is still in effect. The best thing is to do your research and buy products with good repair and service records, especially when it comes to electronics, computers and home appliances.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.