What’s the Difference Between Home Insurance and a Home Warranty?
Home insurance and home warranties are not the same. Each provides different protections, and some homeowners feel more comfortable if they have both types of policies.
This article aims to explain the differences between homeowner’s insurance policies and home warranties. Written by our team of licensed insurance agents, this piece provides consumers with unbiased, honest, and straightforward information.
We’ll answer your most common questions about home warranties and home insurance, such as:
Before we go any further, let’s clarify one major point. If you have a mortgage, the bank likely requires you to maintain a homeowner’s insurance policy. A home warranty product will not satisfy their requirements for property insurance.
Let’s learn why.
What are the Differences Between Home Insurance and Home Warranties?
In short, home insurance covers many common perils that could damage your home. We’re talking about the structure itself and other structures listed on the policy, like garages, outbuildings, guest houses and so on.
What Does Home Insurance Cover?
Home insurance is designed to protect a property owner financially, in cases of:
FireSmoke damageHail damageLightningWind damageAircraft crashesCivil unrest and riotsMalicious mischief and vandalismSome equipment breakdown and mechanical failuresAnd some theft
Usually, a home insurance policy will not cover major regional disasters. We’re talking about floods, tsunamis, nuclear war and earthquakes. You may need to buy a separate policy or add a rider if your mortgagee — that is, the bank or financial institution to which you make your mortgage payment —requires you to carry flood insurance.
The insurance company will provide you with a copy of your policy, including a declarations page or “dec page.” If you’d like to know precisely what is and is not covered in your policy, look there. You can also contact your insurer for a thorough explanation of your coverages.
What Does a Home Warranty Cover?
Home warranties are not the same as insurance. And remember, no mortgagee will require that you carry a home warranty.
These documents don’t protect your structure or outbuildings. Instead, they may help you repair or replace appliances and expensive systems in your home should they malfunction.
We’re talking about your:
Refrigerator / freezersHVAC systems, air conditioners and furnacesEntertainment systemsOven or rangeGarbage disposalGarage door openers
Let’s illustrate the distinctions with a short story, because insurance topics can be complicated.
Story Time: Imagine Anne’s Rotten Freezer
Anne is a young, inexperienced, single homeowner who inherited a small family home. She was away on a 10-day business trip when her home endured a terrific windstorm, complete with hail damage and fallen tree limbs.
When Anne got home, she discovered tremendous damage to her little house. Tree limbs crashed into her roof and exterior, breaking windows, collapsing her porch, and damaging siding. Rainwater and debris were able to soak into her home, damaging the walls, floors and furniture.
The solar arrays (that she owns) were damaged, which caused her freezer to malfunction. It leaked rotting, decomposing food and foul-smelling water all over her kitchen floors, which soaked into her cabinetry.
Anne calls her home insurance company, and they tell her to do her best to mitigate any more damage until the adjuster arrives. She heads to the hardware store for tarps, nails and the like, and she does her best to clean up the rotting freezer water.
What is Covered by her Home Policy?
The adjuster arrives. He explains that her home insurance will cover:
Roofing that was damaged by wind and fallen tree limbsWindows and exterior sidingThe broken awningA new kitchen floor and sub-floor, that was damaged by equipment malfunctionNew cabinetry that was damaged by equipment malfunctionNew furniture and other home contents damaged by the storm
In total, her homeowner’s policy will cover almost all the structural damage caused by the storm, falling tree branches, and equipment malfunction; totaling about $45,000.
Furthermore, her homeowner’s insurance policy will also help pay for a temporary apartment while her home is made habitable again. Anne only needs to pay her deductible of $1,000 and get some repair quotes.
However, there are several items not covered by her homeowner’s insurance.
What is Not Covered by Her Home Policy?
Anne’s malfunctioning freezer must be replaced, and it might not be covered by her home insurance. That’s because the damage was caused by malfunctioning solar equipment, which may or may not be covered on her policy.
If she has a home warranty, however, that rotten freezer is probably covered.
What About the Solar Equipment?
Solar arrays are very expensive and relatively new in the realms of property insurance. Anne will need to read her policy carefully and talk to her adjuster to find out if she has coverage. Sometimes solar equipment is included in a policy, sometimes it is expressly excluded in writing.
In the story above, Anne’s homeowner’s insurance saves the day by covering most, if not all, of the damage caused by an intense weather event. She may find herself paying out of pocket for a replacement freezer or turning to her home warranty provider.
Now, let’s think about situations when a home warranty would come into play.
Story Time: Tom Bought All New Appliances & a Home Warranty
Imagine another homeowner, Tom, who made some excellent investments in cryptocurrency. After cashing out his Bitcoin, he made major upgrades to his home, including all new appliances, air conditioning and plumbing.
We’ll imagine that he spent $80,000 on the very best:
AC unitFurnaceWasher and dryerStoveRefrigerator and freezersPlumbingHot tub / spa
Then, he bought a home warranty policy to cover repairs or replacements of all these items. (The hot tub required extra paperwork and funding.)
Now, Tom sleeps easy at night because he knows his beautiful new appliances will be repaired or replaced at very little cost, should something happen to them.
But, did Tom make the right choice? Only time will tell!
Don’t Forget About Manufacturer Warranties
Brand new appliances and systems are covered by manufacturer warranties for set time. They could be warrantied for one year, five years, even 10 years or longer.
We could spend a lot of time comparing the potential costs of repairs and replacements, versus the ongoing costs of a home appliance warranty. Still, if Tom uses his home warranty just one to replace a $12,000 AC and ductwork, he’s made the right choice. It all depends on how long his appliances continue to function as promised, and how much he pays for his home warranty.
This leads nicely into our next segments on the costs of home insurance and home warranties.
How Much Does Home Insurance Cost?
Nerdwallet.com says the average home insurance policy in the US costs $1,820 per year, and that’s about $151 per month. But your cost for home insurance could be significantly higher or lower.
When deciding how much to charge you for a homeowner policy, insurance underwriters will consider many details, including:
The square footage of your homeYour claims history and other claims in the neighborhoodThe roofing and foundation typesThe materials used in your home constructionThe likelihood of brush firesThe costs of new construction materialsYour history as an insured
Armed with those details, they’ll use formulas to estimate the potential cost to rebuild your home from nothing if it were to burn down completely. Your premium will be based mostly on that amount, but your claims history can be a huge factor, too. (We’ll talk about that more in a moment.)
Of course, there are other bells and whistles included on a home insurance policy, like liability coverage; and the potential for added endorsements, like earthquake coverage or personal article “floater” coverage for expensive artwork and jewelry.
If you choose to buy extra liability coverage — it helps to protect you from lawsuits if someone gets injured on your property — your premiums will be higher. And if you buy extra insurance for your jewelry or artwork, you can expect to pay even more. But square footage and claims history are, arguably, the most significant factors in your price for insurance.
How Does a Claims History Affect Insurance Prices?
Insurance companies exist to make money, not to pay out billions of dollars in claims. A homeowner with no claims in their past, or very few claims, will usually get a better price on home insurance. These are the clients insurers prefer.
Be Honest About Your Claims History When Getting Quotes for Insurance
Claims do happen! This doesn’t mean you’re uninsurable. And you should be honest with insurance agents when shopping for property insurance.
Know that insurance companies all share this information with one another. Thinking back to our story about Anne, above, every insurance company she contacts in the future will know that she had a $45,000 storm damage claim. If she were to be dishonest about this when shopping for insurance, she might find herself paying extra high premiums for her dishonesty.
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How Much Does a Home Warranty Cost?
Per Forbes.com, the average home warranty costs $600 / year, or roughly $50 / month.
Digging a bit deeper, we scoured the internet for home warranty prices, and we found dozens for less than $25 / month. Prices increase from there, and the most expensive option we found is $80 / month. However, we’re sure you could find even more expensive warranty plans if you have many expensive appliances and systems.
How to Shop for Home Warranties
At Einsurance.com, we aren’t in the business of selling home warranty products. However, we’d suggest you ask the following vital questions, and seek the answers in writing before signing anything:
Is there a grace period if I miss my payment or make a late payment?Are solar panels covered?What happens if I move?Do I need to notify anyone when I buy new appliances or have them serviced?
Another question we hear often about home warranties is, “Are home appliance warranties a scam?” And we don’t believe they are a total scam, but you need to carefully compare the costs for your warranty to the potential costs of repairs and replacement.
If we follow Forbes average pricing of $600 annually, over a period of 10 years, that’s $6,000. You might find that you could replace your refrigerator, dishwasher, clothes washer and dryer all in a 10 year period for about the same amount of money you’d pay to a home warranty service.
Then again, you might prefer very high-end appliances, and you might spend triple that amount to replace yours. It’s all about personal preference.
So, Which Type of Policy do I Need? Why?
Unless you have access to millions of dollars in cash on hand, you probably need a homeowner insurance policy. Otherwise, even if you own a home completely and have no mortgage payment, you could find yourself homeless after a house fire or other serious loss.
And remember, if you make a mortgage payment, the lender requires you to keep the property insured. That way, if the home burns down, the lender doesn’t take a loss.
In short, almost everyone really needs a home insurance policy.
Home warranties are different, though, and they only make sense for certain people. Your mortgagee doesn’t require you to keep one.
If you have many expensive appliances, like Tom in our story above, and if you tend to run short on replacement cash from time to time — who doesn’t — you might find yourself sleeping better at night with a home warranty product. You might like the security of knowing your expensive systems will be repaired or replaced for little to no cost should disaster strike.
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