Home warranties and homeowner’s insurance share some common features, but they’re definitely not the same thing. Let’s look at some of the similarities and differences between these two products. Once you understand your options and responsibilities as a homeowner, you can choose the products that best suit your needs. And you just may discover you want both.
WHAT’S THE SAME?
Both homeowner’s insurance and home warranties involve paying a monthly or annual premium for protection for a specific amount of time. Both will protect you financially by covering certain kinds of damage to your home and possessions. When you make a claim, you will be charged a deductible, which is generally customizable with both products. But that’s pretty much where the similarities end.
WHAT’S THE DIFFERENCE?
While they’re commonly referred to as “policies,” home warranties are not insurance plans. Insurance plans are heavily regulated by the National Association of Insurance Commissioners, a body made up of representatives from all 50 states. Regulations vary from state to state, but the NAIC sets rigorous standards that states must adhere to and provides important consumer protections.
Alternatively, each home warranty company sets its own rules and it’s up to consumers to protect themselves. Be sure to do careful comparison shopping and understand the specific terms of the plan you select when purchasing a home warranty.
The other primary difference between home warranties and insurance is that one is mandatory for any homeowner with a mortgage. The financial institution that lends you money to purchase your house will require that you carry homeowner’s insurance as a condition of borrowing. Purchasing a home warranty, on the other hand, is optional.
DIFFERENT KINDS OF PROTECTION
Homeowner’s insurance comes in two basic forms: liability insurance and property insurance. Property insurance is closer to a home warranty. Both protect against damage to your home, but for the most part, they cover different things. Homeowner’s insurance protects the structure and contents of your home if it is damaged by such factors as fire, wind, or fallen tree limbs. Home warranties protect certain appliances and systems in your home that need repair.
For example, if a water pipe breaks and damages your carpet, the property insurance section of your homeowner’s policy will cover the cost of replacing the carpet. However, it won’t cover the cost of fixing the broken plumbing. By contrast, a home warranty will pay your plumbing bill, but it won’t pay to replace your carpet. Here, you can begin to see why both types of coverage may be beneficial.
In addition to natural disasters, property insurance covers damage to your home if you are vandalized. It also covers your personal possessions if you are burglarized. Home warranties do not offer protection in those cases. However, unlike homeowner’s insurance, they do cover repairs to items or systems necessary as a result of normal wear and tear. Home warranties also do not provide any liability coverage.
COVERAGE TYPES & DEDUCTIBLES
Both homeowner’s insurance and home warranties allow you to tailor certain policy features to suit your needs. For example, with a home warranty, most companies allow you to select coverage for systems, appliances, or both. Some offer pre-set packages, while others let you pick and choose the items you need covered. For example, if you own a pool, you can elect pool repair coverage. Homeowner’s insurance companies also permit you to add “riders” to your policy to cover items that are not normally covered in a basic policy. If you have expensive jewelry or antiques in your home, it’s a good idea to add riders to be fully protected.
Many home warranty and all homeowner’s insurance companies also allow you to customize your deductible. In the case of a home warranty, the deductible you pay is actually a service call fee. Home warranty deductibles generally range from $60 to $125. Homeowner’s insurance policies usually offer deductible choices between $500 and $2000, but some policies establish your deductible based on a percentage of your home’s value. Choosing a higher deductible will bring the cost of either type of policy down.
With a homeowner’s policy, you can generally choose your coverage limits. Your mortgage lender will require that you carry insurance that meets or exceeds the fair market value of your home. If you live in a home that wouldn’t necessarily fetch a high price on the market, but would cost a great deal of money to rebuild—such as in the case of a historic home that features high-quality or unique craftsmanship—it’s best to choose coverage limits that exceed your home’s value.
There are two types of property insurance: Actual Cash Value (ACV) and Replacement Cost Value (RCV). Here’s the difference in the event of a loss. If your home features expensive but older appliances, ACV would cover the depreciated cost of a used gourmet stove. RCV would cover the cost of purchasing a brand-new stove with the same features as your old stove. Similarly, if your home features elaborate plaster molding, ACV would pay to have a store-bought product installed in your home. RCV would pay out enough for you to hire an expert plasterer to rebuild your molding to original specs.
By contrast, RCV coverage is not an option with home warranties They have very specific limits to how much they will pay to repair or replace specific items or systems. Those limits may not cover the entire cost of your specific appliances or systems. Furthermore, many home warranties limit the total amount they will pay out in a single policy term, which is usually one year. You should carefully study the coverage limits of any home warranty to decide if is worth the price.
EXPERT ADVICE: THE BOTTOM LINE
Since home warranties cover items not covered by property insurance, many homeowners decide to carry both. The good news is that home warranties cost less than homeowner’s insurance. A comprehensive systems and appliances plan could cost you as little as $500, while the average cost of homeowner’s insurance on a $250,000 home is around $1400.
Your local real estate agent can be an invaluable resource in helping you make smart financial decisions throughout the home buying process. You even may be able to negotiate including a home warranty in your purchase agreement. Realtors® can also recommend insurance companies.
Your home is likely your largest financial asset. Both home warranties and homeowner’s insurance help you protect it.