Owning a home can be a risky venture, considering all the hazards and uncertainties that can imperil your property—from burglars and hail storms to a furnace that suddenly breaks down in the middle of winter. Fortunately, consumers can opt for two forms of important protection that each provides a financial safety net should an unforeseen calamity like the aforementioned occur: (1) homeowners insurance and (2) home warranty coverage. But it’s important to understand the differences between them and when it makes sense to opt for both types of policies.
- What Homeowners Insurance Covers
- What a Home Warranty Covers
- The Difference
- How to Choose Between the Two
A homeowners insurance policy safeguards you and your residence from devastation and loss caused specifically caused by a set of perils: by fire, theft, storms and many natural disasters, acts of God, vandalism, accidents, and other threats spelled out in your policy. Your policy covers your home’s exterior and interior as well as personal property. Additionally, it can protect you from liability in the event someone is injured on your property. If you’ve taken out a mortgage loan to finance your home, chances are your lender requires you to have homeowners insurance to protect their interests and yours.
By contrast, a home warranty functions as a service contract that typically covers essential appliances and systems within your home, providing repair or replacement if an included piece breaks down. Many home warranty contracts include coverage for plumbing, electrical, and heating and cooling systems, as well as the refrigerator, stove, oven, dishwasher, garbage disposal unit, washer and dryer. Most home warranty companies also offer additional coverage for an extra charge, such as protection for your swimming pool (which would get treated differently under your home insurance policy) or hot tub.
Contracts generally last 12 months and are renewable. The annual coverage fee often starts at $400 and up; the cheapest plans offer a basic level of protection, while more expensive plans provide more expansive coverage and lower out-of-pocket costs. Unlike a homeowners insurance policy, a home warranty plan usually doesn’t require the payment of a deductible; instead, you're charged a moderate service call fee (commonly around $100 or more). Homeowners warranty coverage is purely optional and not required by your mortgage lender or anyone else.
The real difference comes down to equipment and appliances in the house. As comprehensive as homeowners insurance coverage might sound, there are a couple of gaps. The latter typically does not cover mechanical equipment in need of repair or replacement, unless they were accidentally damaged by the specific perils outlined in the policy, including: fire, weather or act of God. Certain types of tears, cracks, burns, overflows and freezing of pipes, HVAC or fire sprinkler systems can be covered by your home policy as well.
Beyond this, homeowners insurance is meant to protect consumers against damage caused by natural disasters to the physical house and your personal property, along with some measure of liability coverage. The dollar amounts for both coverage and insurance premiums tend to be higher in home insurance, which makes sense give the greater amount of risk assumed by the company.
Here's an example: “A leak in a pipe that required a plumbing repair would potentially be covered by both policies. The home warranty would cover the repair of the pipe, but not damage caused by the leak. If the leak was major, your homeowners insurance would cover the damage," Bruce Ailion, a Woodstock, Ga.-based realtor and attorney, says.
A home warranty can offer several benefits, including:
- Peace of mind that your defective appliance or component will be fixed or replaced in a timely manner, without causing you undue financial hardship. This can be particularly comforting for owners of older homes with mechanicals that have been in use for years. “The former owners of my 45-year-old home paid for the first year of warranty coverage, and we have renewed it since," says Carol Gee, a homeowner in Atlanta. "In the past, I questioned whether we should continue it. But recently, my water heater failed, and having to purchase a new one would have cost me more than the annual warranty fee. Since then, we've used it for the air conditioning, garbage disposal, stove and other appliances."
- The warranty company will take care of dispatching a service provider, within its network, to your property, saving you the time and aggravation of having to find a qualified contractor or repairman.
- The fees involved are relatively inexpensive and can be considered a worthwhile investment compared to the full expense of having to replace or fix a costly home component. In many cases, the first 12 months of warranty coverage is included at no charge to the buyer of a new or existing home, with the annual fee paid for by the seller or real estate agent.
However, home warranties can have their drawbacks, too:
- Warranty companies have coverages that limit the maximum they will pay out for a repair or replacement of a defective unit or component. For example, a company may limit its coverage of an HVAC system up to $1,500, which may be insufficient to pay for all the necessary costs, or in a worst case scenario, replace it.
- The warranty company may charge extra fees that fall outside of your coverage terms, such as the cost for hauling away an old appliance and its proper environmental disposal.
- The warranty company may deny coverage and if it determines that the unit/component has a pre-existing condition, was not properly installed, maintained or serviced, doesn't abide by area building codes, or was improperly used; also, you may have to gather and furnish receipts and paperwork substantiating this required prior maintenance. “I have a love/hate relationship with home warranty companies," says Ailion. "It's great when they cover an expensive repair like an AC unit or furnace, but it's sometimes a fight to get the item covered and a disappointment when the fine print excludes some or all of the issue."
- Typically, you must use the service provider/contractor dispatched by the warranty company, and not an out-of-network repair professional of your choosing. This means that the partnering contractor may not be bonded, licensed or insured as you would prefer. Warranty companies also usually do not reimburse you if you attempt to do the work yourself or enlist an outside contractor.
Many experts recommend opting for home warranty coverage to better shield you from potentially expensive mechanical and system repairs that homeowners insurance won't cover. Others, however, warn that warranty providers too often exclude assumed coverage for questionable reasons and subjective technicalities, and that it's difficult to recoup the cost of investment in a warranty policy. Additionally, homeowners run the risk of experiencing shoddy repairs by a provider they did not choose, or being forced by the warranty company to go with a repair when a replacement is truly needed.
To better determine if a home warranty plan is worth the money for your situation, try to calculate the remaining years of service you can count on for each appliance/system you're seeking to cover (click here to view a chart indicating the average lifespan expected for major appliances and systems, provided by the National Association of Certified Home Inspectors), as well as the cost to replace each of those components. Compare the true cost of one repair or replacement with what you would likely pay to a warranty company and one of its service providers; remember, however, that you may never even use your warranty coverage within your contract period.
"It may not make a lot of sense to buy a warranty plan for a new construction home, unless it's thrown in free by the builder or Realtor," says Chris Hackett, director of personal lines policy for the Chicago-based Property Casualty Insurers Association of America.
Additionally, “warranty coverage is probably best for homeowners who do not have large cash reserves," Ailion says.
Instead of purchasing a warranty, consider regularly maintaining and servicing your existing components to extend longevity and carefully researching and shopping around for highly rated appliances and systems with a better track record of reliability; likewise, be prepared to replace a long-in-the tooth unit, as soon as it breaks down, with your thoroughly researched replacement product.
Do Your Homework First
Prior to purchasing a home warranty plan, follow these tips:
- Review the contract and its fine print carefully; be clear on what's covered and what's not.
- Learn more about the service providers the warranty company partners with: are they nearby, reputable, and licensed, bonded and insured? How are they rated by your local Better Business Bureau?
- If you haven't yet closed on your home purchase, consult with your home inspector. "This professional is best suited to tell you when the home's appliances and systems may fail and if warranty coverage is worth it for this particular house," says Hackett.