Breakdown of iPhone protection and warranty in my experience:
* If an iPhone is broken, and Apple determines that the damage is not covered by warranty (or the device is outside of the ~1 year warranty), they will either charge you the amount it costs to fix the device (i.e., replace the screen) or provide you with a refurbished iPhone of the exact same color and model for ~$249 (in my experience). I think $249 as a replacement for an iPhone is completely reasonable for a device that retails for $649. If you drop it in your toilet and the screen is cracked with water damage you can get it replaced for an extremely reasonable price unless you have a better deal lined up with your provider (which may give you a discount).
* Same if out-of-warranty as previous
* Warrant is extended to 2 years total (1 additional year)
* While under warranty a broken device that is due to some fault of the user (i.e., dropping in the toilet) costs $49 to replace (limit 2 per customer)
I think AppleCare+ is pretty decent "insurance" for $99. The only thing is it doesn't scale with device cost. The folks buying the more expensive 64GB iPhone with Apple+ will be getting a better value than the ones with the 16GB model.
If I were outside of my iPhone's warranty, then I would send it to one of these shops to be fixed most likely. While in-warranty I'd have Apple fix it even if I had to pay for it (depending on how close I was to the end of my warranty status...obviously if I only have a month left...yeah).