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Consumer Reports gives three main reasons for calling extended warranties "notoriously bad deals" that are best avoided. Based on its annual survey of subscribers, it found that:
- The vast majority of repairs are made while the product is still covered by the standard manufacturer's warranty.
- Products seldom break between the end of the manufacturer's warranty and when the service plan runs out two to three years later.
- When electronics and appliances do break, the average repairs don't cost much more than the price of the extended warranty.
They've gotten better
Today's service plans are significantly better than those sold 10 or 15 years ago. Most states now require these contracts to have standard provisions and disclosures.
"That legislation, which we supported, has chased a lot of the bad actors out of our industry and has left a strong, vibrant group," said Tim Meenan, executive director of the Service Contract Industry Council.
Most service contracts now offer a 30-day "free look" period. This gives you time to study the terms and conditions and cancel, if you want, and get a full refund. You should also be able to cancel at any time during the contract and get a prorated refund.
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Many service contracts also cover mobile devices for accidental damage, something not covered by the typical manufacturer's warranty.
"I think it has changed people's minds about whether they should buy one or not," said Ty Shay, chief marketing officer at SquareTrade, one of the big players in the extended warranty market. "Our research indicates that 1 in 3 people will damage their smartphone within the first 12 months of owning it. In most cases, that failure will be from dropping, crushing, falling into a swimming pool or some other mishap."
For Tony Weiss, an entrepreneur in Frisco, Texas, it was a "silly mistake" in the bathroom. He was texting on his new iPhone 5s, when it slipped out of his hands and into the toilet.
Weiss, who uses his phone for business, could not wait for a repair. He needed a new one right away. SquareTrade told him to go to the Apple store, buy a new phone and send them the receipt. The reimbursement was in his PayPal account within a half-hour of doing that.
"I got the same phone that I had destroyed, no questions asked," Weiss told me. "Literally, within an hour, I had a new iPhone in my hands. I was very pleased with the experience. They treated me great."
Weiss told me he feels the $99 he paid for the two-year coverage was a fair price. Even after paying the $99 deductible, it saved him about $600 on that new phone.
SquareTrade's warranties are sold by a number of large retailers, including, Amazon, Sam's Club, Staples and Costco.
In fact, it's the first service contract Costco has ever offered. Steve Messmer, Costco's assistant general merchandise manager, told me corporate executives had been turned off by the industry's "overall bad reputation" for inflated prices and problems with taking care of customers when a product broke.
"SquareTrade has been a real good program for us," Messmer said. "We've had 35,000 claims filed so far and only one or two complaints."