Both home insurance and home warranties cover damage to appliances and vital home systems. But the primary difference between the two stems from the cause of the damage. Home insurance covers unexpected damage: vandalism, theft, natural disasters.
Home warranties cover general wear and tear for specific home systems.
What Is a Home Warranty?
For homeowners with a mortgage, a home warranty, unlike home insurance, is optional. It acts as a service warranty for repairs and replacement of predetermined systems in the home.
How Do Home Warranties Work?
When you get a home warranty, you agree to pay the monthly or annual fee in exchange for a flat rate on service calls.
Then if an appliance or system that is part of your plan breaks down, you only pay the service call fee and not the cost to repair it.
Instead, your home warranty company will send a technician that forms part of their network to your home to diagnose the problem.
The technician will bill the home warranty provider for the work, and the company will cover the amount provided it is within your coverage limits.
What Are The Home Warranty Coverage Limits?
Usually, your full coverage amount will be divided among the systems and appliances you’re covering. So, for example, each appliance may receive $1,500 a year for repairs or replacement, with the total sum of the cover not exceeding $15,000 a year.
Of course, your limits will depend on your policy.
When Does A Home Warranty Take Effect?
If you’re buying a home and a home warranty — usually paid for by the seller — is included at closing, your home warranty takes effect immediately.
This changes to between 15 and 30 days if you already own the home.
What Can You Cover With a Home Warranty?
Home warranties are often segmented into different plans that are dedicated to either appliances or systems, with more comprehensive plans covering both.
Appliance plans cover common household appliances like a refrigerator, dishwasher, washer and dryer, stove and oven, etc.
System plans cover the HVAC, plumbing, and electrical systems.
Comprehensive or combination home warranty plans cover systems and appliances.
Some companies will also allow you to add warranties for systems and appliances that aren’t typically covered in standard plans.
Septic systems, wells, lawn sprinklers, pools, and spas are some of the systems you can include in your plan at an additional fee.
You can also include a second appliance — so instead of covering one dishwasher or refrigerator — your plan covers two. This will also come at an extra cost.
Are Home Warranties a Waste of Money?
Some homeowners are skeptical about whether home warranties are useful or just a waste of money. In most cases, home warranties are not a waste of money because they protect your appliances and systems from common damage and wear and tear — something insurance doesn’t.
Home warranties are also flexible. If you have new appliances that still have the manufacturer’s warranty, you can cover your home systems and forgo appliance coverage.
Then consider the cost of a home warranty. For homes along the West Coast, basic home warranties start at about $50 a month or $600 for the year.
When you claim, you then pay a flat service fee, ranging from $55 to $150 per call out.
The lower your call-out fee, the higher your home warranty fee will be. Consider the average cost of repairing an appliance: $150 to $600 for an oven repair, $100 to $200 for a dishwasher repair. Even if only one appliance breaks, you’ll likely break even. If more than one breaks within the year, your home warranty will save you hundreds, if not thousands, of dollars.
With this in mind, it’s easy to see that having a warranty makes far more financial sense.
The Difference Between Home Warranties and Home Insurance: Do You Need Both?
Ideally, yes. Owning a home comes with plenty of expected — and unexpected — costs, even if you live in a newer home. Do you want to go digging into your pocket every time something in your home breaks and needs repair?
A home warranty guarantees you don’t have to do that by covering the cost of repairs.
Home insurance, however, covers the replacement or repair cost caused by unforeseen events: theft, vandalism, fire, natural disasters.
The likelihood of your dishwasher breaking from wear and tear rather than flooding is quite significant.
If you have coverage for something that rarely happens, you should probably also have coverage for something predictable — that you expect to happen.