Buying a home is the single biggest investment most people make. As a result, fully protecting your new home is important. The two most common ways to protect a home are through a home warranty and home insurance.
While they may sound similar, a home warranty and home insurance are quite different. A home warranty covers failure of a home’s systems and appliances, while home insurance covers damage to the house itself from events such as fire, hail, theft or vandalism.
What Is a Home Warranty?
A home warranty is a service contract that protects a home’s major systems and appliances. It helps homeowners by minimizing the cost of repairing or replacing these expensive items if they break down. It also reduces the hassle of finding a qualified service contractor.
|Covered Systems||Covered Appliances|
|Air conditioning (HVAC)||Washers and dryers|
|Water heaters||Built-in microwaves|
|Ductwork||Garage door openers|
How the Servicing Part Works
The home warranty company works with qualified repair businesses including plumbers, electricians and HVAC companies. When a system or appliance needs attention, homeowners can arrange for a service call through the home warranty company. This greatly decreases the stress of finding a trustworthy contractor on their own.
Homeowners aren’t responsible for the cost of the system or appliance being repaired or replaced. Instead they pay a service fee for their visit.
What Does a Contract Cost?
A home warranty contract usually lasts for one year with an option to renew at the end of each year. It generally costs homeowners a few hundred dollars annually.
Homeowners can pay this amount in one lump sum or spread it out into monthly premium payments. Additionally, the homeowner pays a service fee each time an item needs to be repaired or replaced.
Homeowners can choose from a range of warranty plans. They differ in terms of monthly premium, level of coverage and service fee. For example:
A basic plan may have:
- Lower monthly cost
- Limited coverage plan
- Higher service fee
A superior plan may have:
- Higher monthly cost
- More extensive coverage plan (includes more appliances)
- Lower service fee
How to Read a Contract
Homeowners should read their home warranty contract carefully before signing. Here are some things to look for:
- Identify systems and appliances covered by the warranty.
- Find out which service contractors the home warranty company uses. Make sure they are local, reputable, licensed and bonded.
- Look for any exclusions of coverage, extra fees or a maximum payout for a repair or replacement.
What Is Home Insurance?
A homeowners insurance policy covers damage to the home, damage or theft of personal property and personal liability. There are many different coverages in a home insurance policy that work together to provide overall protection. A typical home policy consists of the following coverages:
Dwelling – Protects against damages to the physical structure of the home, as well as those systems that are permanently installed (e.g., plumbing, wiring, heat, air conditioning). Dwelling coverage is used to repair or rebuild a home in the event of a covered loss. It’s also the primary coverage the homeowner’s lender will require to purchase the home.
Other Structures – Covers structures on your property that aren’t connected to the main house, such as a garage, fence, shed or barn. While these structures may not be as valuable as the house itself, they can still be expensive to repair. The Other Structures coverage level is usually 10% of the Dwelling coverage.
Personal Property – Covers most of the personal property owned by an insured inside and outside the home. Examples include furniture, appliances, TVs, computers, clothing, lawn furniture and some jewelry.
Loss of Use – If a homeowner can’t live in their home during repairs, Loss of Use reimburses them for temporary housing, meals and other related expenses. Of course, any damage must be covered by the homeowner’s policy. Loss of Use coverage is usually 20% of the Dwelling coverage. This is sometimes referred to as Additional Living Expenses coverage.
Personal Liability – Provides protection if the homeowner is legally responsible for property damage or injuries to others. Personal liability coverage may help pay for legal expenses, medical bills and other costs.
Medical Payments – Protects the homeowner if others are injured on their property. For example, if a guest in the home falls and requires treatment, Medical Payments takes care of the medical bills whether or not the homeowner was responsible for the guest’s injuries. Coverage is usually limited to $1,000 per person, unless additional coverage is purchased.
If a homeowner wants to maximize their protection, they can customize their home insurance policy by adding optional coverages. Examples include coverages to protect them from cyber-attacks, identity theft and natural disasters like floods and earthquakes.
What Is the Difference Between a Home Warranty and Home Insurance?
The primary function of home warranties and home insurance is the same—to protect a home from unexpected damage or loss. That said, there are some important differences between them.
A home warranty covers a home’s major systems and appliances, but not the home itself or the homeowner’s belongings. A home insurance policy covers the opposite: It covers damage that occurs to the house itself as well as the owner’s belongings, but not the home’s major systems and appliances.
Cause of Loss
A home warranty mostly protects against defects. Home insurance covers accidental causes of loss. Examples of accidental causes include fire, hail, lightning and certain types of water damage.
Typically, the annual cost of a standard home warranty is less than a standard home insurance policy. Home warranty service fees are also usually lower than home insurance deductibles. A deductible is the out-of-pocket amount that a homeowner must pay before the insurance carrier begins paying for the loss.
Do You Need Both?
A homeowner is not required to purchase a home warranty. However, on newly built homes, a warranty is sometimes provided upfront by the builder or a third party.
Home insurance is a different story. Mortgage lenders usually require that homeowners purchase a home insurance policy that provides sufficient dwelling coverage to protect it from fire, hail, lightning, tornado, vandalism and other events. The mortgage holder is listed as an additional interest on the home insurance policy.
Which Should You Buy?
Choosing between a home warranty and a home insurance policy is not an either-or decision. This is because mortgage lenders generally require home insurance. For many homeowners, a home warranty is a logical supplement to their home insurance policy. A home warranty can help reduce financial risk in the event a major home system or appliance requires expensive repairs or replacement.
A home warranty is particularly helpful when it comes to big-ticket items like a water heater, refrigerator or HVAC system. When these items break down, a home warranty is a reliable safety net that can save you from major expenses.
A good way to decide if you should purchase a home warranty is to examine the numbers. Figure out how much it would cost to repair or replace the systems and appliances in your home—especially the older ones. Now look at the cost of an annual home warranty service contract. This simple analysis can help you decide if a home warranty is worth it for you.
Other Ways to Protect Yourself
If you decide not to purchase a home warranty, there are other ways to protect yourself against unforeseen repairs to the items you depend on every day. One option is to put the equivalent of the home warranty payments into a separate fund in case repairs come up.
Another option is to add Home Systems Breakdown Coverage to your home insurance policy. This optional coverage protects against the mechanical breakdown of systems and appliances.