What’s the difference between a home warranty vs. home insurance?
Imagine you’re preparing to make an offer on a new home, and your agent suggests you request a home warranty from the seller. As a condition of your mortgage, your lender has already informed you that you must obtain homeowner’s insurance.
Doesn’t it seem redundant to have both?
The truth is it isn’t.
A home warranty and a homeowner’s insurance policy serve two entirely different purposes despite the apparent similarity between the two. Homeowners — and especially those who are about to buy real estate for the first time — need to understand the differences between the two so they can determine whether they require one, the other, or both.
Home Warranty: The Basics
An independent governing body in each state regulates companies within the home warranty industry. Even though warranties function in a similar manner to insurance, they aren’t the same thing as an insurance policy. You can use a home warranty to repair, replace, or service your electrical system, water heater, plumbing system, central vacuum system, and kitchen appliances. Depending on the policy and service contract you get, home warranty coverage can also include things like air conditioning units, HVAC systems, septic systems, and garbage disposals.
Purchasing a home warranty can be particularly appealing for homeowners who lack the financial resources to cover unexpected, expensive repairs or who lack the time to research reputable contractors. Home warranty providers give these homebuyers the peace of mind that comes with knowing they have comprehensive coverage if they buy a house and experience 10 major appliance breakdowns through normal wear within a few months.
In some cases, however, homeowners may save more money in the long run without a warranty, especially if they own newer, higher-quality home appliances and built-in systems unlikely to break down in the near future.
When you notice a malfunctioning appliance or home system and have a warranty, you should file a claim with your service provider — like American Home Shield (AHS), Cinch, or Liberty Home Guard, three of the best home warranty companies — as soon as possible to request service. That’s because some companies won’t accept your claim if the covered item hasn’t worked for a while. Upon request, a technician will come to your house to diagnose the issue and see if it’s a covered repair. If not, you may have the option to purchase add-on coverage.
Home Insurance: The Basics
Home insurance is home protection that covers big-ticket items. You can get home insurance for roof leak coverage. You can also use it to cover damage from major accidents, bad weather, and more. Depending on the plan option you select, the policy will likely cover replacements and repairs in the case of theft, flooding, and fire.
In most cases, lenders require homebuyers to get home insurance when they get a mortgage. You’ll pay different amounts depending on the bank’s requirements, your own preferences, and what’s estimated to cover your home if any of the above happens.
The price of home insurance varies and can also differ based on where you live. In most cases, the insurance company gets paid directly by the owner each year. Sometimes, insurance premiums are tacked onto mortgage payments.
The Difference Between Home Warranty and Home Insurance: Coverage and Costs
What does a home warranty cover?
Most home warranties cover the main systems in a house — like malfunctioning garage door openers, built-in microwaves, ceiling fans, water dispensers, sump pumps, exhaust fans, ductwork, icemakers, and cooktops. Home warranties can also cover large appliances like dishwashers, heating systems, air conditioners, ovens, refrigerators, washers, and dryers.
There are different home warranty plans that offer coverage on all or some of these things. As you shop for a plan, make note of any exclusions in each policy to determine what your coverage limits and coverage options are, whether you need to purchase additional coverage, or if it’s a complete home warranty or a basic plan.
Damage caused by malfunctioning systems or appliances isn’t covered by home warranties. For instance, if a toilet leaks, the home warranty company will pay to fix the toilet but not any damage to the house caused by the leak. On the other hand, homeowners insurance would cover this cost.
What does home insurance cover?
There are six main areas of coverage in most home insurance policies. Let’s take a look at each one:
- Dwelling: In dwelling coverage, you get cover for your house and its structures, including the interior, the exterior, the foundation, and cabinetry.
- Coverage for other structures: You’re covered for detached structures like fences, sheds, and garages.
- Personal property coverage: Covers items in your home from covered damages. It usually pays for the replacement of the damaged item or its depreciated value.
- Loss of use coverage: If you have a disaster that damages your house and you have to move temporarily, loss of use coverage pays for your living expenses.
- Liability coverage: This covers you if you cause an accident, damage someone else’s property, or cause bodily injury.
- Coverage for medical payments to others: If someone gets hurt on your property, insurance covers the medical bills.
Some home insurance companies offer endorsements to round out your coverage. The most popular endorsements are identity theft, earthquakes, and backup water.
Home Warranty Cost
Most home warranties are 12-month contracts. Unlike homeowner’s insurance, you don’t have to get a warranty to get a mortgage.
It’s an optional purchase, usually after you’ve bought a house, but it’s a smart one. For an additional fee, you can add coverage for items like roof leak repairs or pools and spas to your home service plan. All of the fixes come with a workmanship guarantee.
No matter which plan you select, you will have to pay a small service call fee when a technician comes to repair covered appliances.
Home Insurance Cost
Most banks require you to obtain home insurance before issuing a mortgage on a home. You will also most likely have to pay for your home insurance as part of your mortgage payment, at least for the first year.
The average cost of homeowners insurance is $1,312 per year, though this can vary widely from state to state and depends on which coverage plan you choose. You’ll have to renew your policy each year.
When your insurer approves your claim, you’ll have to pay a deductible. But when you have a comprehensive plan, the policy will cover any additional costs. When it comes to home insurance comparisons, you’ll want to do your research since different companies offer different rates and deductible requirements.
Home Warranty vs. Home Insurance: How Do They Work?
How a Home Warranty Works: Example
Here’s an example of how a home warranty could be useful.
Consider a scenario where one of your covered systems — your dishwasher — stops working because of plumbing stoppages. You would:
- Report broken or damaged covered items to your warranty provider.
- Pay a service fee.
- Let the warranty company send out a technician to fix the problem.
How Home Insurance Works: Example
Here’s an example of how you can use your homeowners insurance.
Let’s say your fence collapses during a storm. You file a claim with your insurance company. Depending on the damage, they may request photos or send an adjuster out.
You will receive a check from your insurance company for the full repair amount. They’ll subtract your deductible from the total cost. Once your insurance company determines the damage’s estimated cost, it will send you a check for the full amount. Then, you can schedule repairs when it’s convenient for you.
Do You Need Both Protection Plans?
It may be necessary to purchase both home insurance and a home warranty to protect the structure and systems of your home — particularly for the first year or two you live in the house. If you have home insurance, you won’t have to pay high repair costs if the house’s structure begins to show signs of damage.
A home warranty can help cover the cost of repairs or replacement if a malfunctioning appliance or system damages your home’s structure or belongings. Consider purchasing a home warranty along with your home insurance policy. Together, they’ll offer protection for all parts of your home.
When you’re ready to buy a home warranty, research your options and check with the Better Business Bureau (BBB) and read home warranty reviews to make sure the vendor is reputable. Ask for a free quote and shop around to make sure you’re getting the best deal.
Here’s to picking the best warranty for your unique circumstances!