I'm Neal and I am here to assist you. Only accept when you are happy with my assistance. If I can't help I will open your Question to other experts.
While it is a little unusual for one to fail at only 4 years old, it does happen, it sounds like from you description that there is a bad bearing and something has broken which may have caused the bearing to fail. The only good option is to repolace it as they suggested.
What other questions did you have about it?
What would that usually cost me to have that fixed? Im assuming they would have to open that transer case and replace bearing but I just want to be sure Im not going to over pay.
If it needs a rebuilt unit, they run about $2500 and if yours is anything more than just a bearing that will be what you will need.
Labor to install it is 5.2 hours at whatever their labor rate is.
If they can repair yours it is wide open depending on how bad it is but the labor to remove and install will still be 5.3 hours plus the parts and the time to make the actual repair.