People may find that they are offered home warranty coverage when they buy a new home. Although both home warranties and home insurance can cover emergency events, and each provides you with a reduction of repair expenses, the two products have their differences.
Your home insurance policy is not a home warranty. Whether you're a first-time or experienced homebuyer, you should understand what a home warranty covers. This can help you decide if you should purchase one in addition to your home insurance.
- A home warranty covers appliances and systems within your home that homeowner's insurance doesn't cover.
- You can find home warranties that cover limited items, or plans that cover everything.
- Warranties can be offered by insurance companies, real estate agencies, and mortgage lenders.
- Warranties work like insurance policies with deductibles and coverage amounts, so you should be familiar with the limits before purchasing one.
What Is a Home Warranty?
A home warranty is an insurance product that covers certain items and parts of your home. It can help you finance any necessary repairs. A home warranty is like a service contract (and sometimes a replacement contract) on expensive items in your home.
This can be a huge help for homeowners who forgot to budget for appliance breakdowns or other maintenance costs. Instead of a large, lump-sum payment to replace a major appliance, you pay monthly premiums and a deductible.
Manufacturer warranties are similar in concept, except they cover specific appliances or items for a specified term. Home warranties generally apply to multiple items in your home, though the details vary. You can choose basic home warranty coverage or opt for extensive coverage—it all depends on your needs, budget, and how much of a risk you think you might have. Here are some examples of coverage plans:
- Appliances only
- Systems in your home, like HVAC
- Appliances and systems
- Add-on coverage for items like swimming pools
Home warranties are available for property owners of all kinds, so it doesn't matter whether you own a house or a condo. A home warranty may be a useful product for homeowners and condo owners alike.
Pros and Cons of a Home Warranty
Home warranties play an important role in protecting your home's appliances and protecting you financially. There are a few downsides to consider though, so make sure you're making a fully informed decision if you choose to buy a policy.
Provides peace of mind for costly repairs
Means lower repair costs on unanticipated breakdowns
Offers set premiums and a known deductible for repair costs
Protects major appliances as they age, unlike homeowners insurance
Doesn't cover all appliances
Even covered appliances lose coverage when they aren't properly maintained
Requires you to pay premiums all year, even if you don't end up needing coverage
Won't cover damage from fire or other disasters (this is what insurance covers)
You may have to use the warranty company's network of contractors and service people
What Is the Best Home Warranty?
The best home warranty contract is one that most fits your needs. Home warranty programs offer various levels of coverage and conditions—they might cover big-ticket items like air conditioning systems, electrical wiring, or kitchen appliances.
To better identify your needs, it can help to understand how home warranties differ from home insurance policies. They both cover unexpected circumstances, but your homeowners policy may exclude things like regular wear and tear and mechanical breakdown. A home warranty is designed to cover things that are not normally covered by home insurance.
For example, if your dishwasher breaks down, or the air conditioning system fails, your insurance policy does not cover the replacement or repair of those items. A warranty, on the other hand, might pay for repair or replacement.
What Is Covered By a Home Warranty?
Here are some examples of things that may be covered under a home warranty program. Remember, every home warranty program is individually managed, so be sure to ask for the specifics of the policy you are considering before committing to the contract.
As a general reference, here are some examples of appliances and services covered by a good warranty:
- Electrical wiring and infrastructure
- Washers and dryers
- HVAC systems
- Contractor or repair services by plumbers, electricians
- Central vacuums
- Garbage disposals
- Ceiling fans
- Bathtubs with jets and pumps
- Jacuzzis, pools, and spas
Where to Acquire Home Warranty Coverage
Several entities offer home warranties. There are unique perks and drawbacks to each provider, so consider your situation and shop around before buying a warranty.
Home Insurance Companies
Although home warranty coverage is not a part of standard home insurance, your home insurance agent or broker may have some options for you. Home warranties are becoming more popular, so many home insurers are starting to offer package endorsements you can add to the insurance policy for warranty features.
The advantage of using home policy endorsements to replicate home warranty coverage is that, should something happen, you will only have one point of contact for your coverage needs. This could save you a lot of time and trouble during an already difficult time.
New Home Builders
If you have bought a newly built home, then the builder may offer a basic home warranty. It may be limited to the electrical, plumbing, structure, and air conditioning systems. You may be able to get more extensive coverage through a privately purchased home warranty contract.
Real Estate Agencies and Brokers
Some real estate agencies or brokers may offer a complimentary home warranty as part of the value-added service they offer when they sell you a home. In those cases, the warranty may only be for one year, or they may only include basic coverage.
If you are getting the warranty for free, ensure that you understand the terms.
For example, the warranty that came with the home you bought may only be free for a set timeframe, so you'll need to know how and when to cancel it to avoid being charged after it expires if you don't want it anymore. You also need to understand what the warranty covers. When in doubt, you should ask for more information rather than assume the coverage is what you need.
Some mortgage lenders also offer a free home warranty as part of their value-added packages and services. You may see the option to opt in or opt out of the home warranty when you sign your mortgage documents.
A home seller may also choose to purchase a home warranty when they put their home on the market. This can be very advantageous if you're trying to sell a home because it adds an extra level of security and confidence for prospective buyers. This is why you may see a home being sold with a home warranty included in the deal.
Questions to Ask About a Home Warranty Before You Buy
When you're shopping around for warranties, it's important to ask questions to ensure you fully understand what is covered and if there are any limitations. If you need some help figuring out exactly what to ask, here are some starter questions:
- Are there limits for each coverage?
- Are there certain parts of covered appliances that are excluded?
- Can certain conditions cause a covered appliance to become uncovered? Some plans exclude older appliances or appliances that aren't subject to regular upkeep and maintenance.
- Are there maximum amounts payable?
- What are the deductibles?
- What kind of service calls are covered?
- Is there a limit on how many service calls I can make?
- Is there a charge to have a professional come and assess whether something is covered or not? Some warranty plans charge service fees in addition to your deductible.
- Do you have to use the company's network of contractors and service people, or can you choose your own?
- What is the process to make a claim, and how will you be paid?
- Is there a waiting period?
- How does the company interpret pre-existing conditions?
- What kinds of damages are excluded? Ask for examples to make sure you understand the range of coverage. Many situations can have tricky restrictions or limitations, especially with electrical and plumbing.
Do Home Warranties Have Deductibles?
Home warranties do have deductibles. As with insurance deductibles, you can use the deductible to save money on your home insurance. For example, you can choose to take a higher deductible on your home warranty service contract to pay a lower annual fee. If you're considering this strategy, ensure you can afford to pay the higher deductible if the need arises.
Perhaps the best way to understand the benefits of a home warranty is to consider a couple of examples.
How a Home Warranty Can Work With Home Insurance
Imagine that your dishwasher breaks down. Water leaks all over the floor and through the ceiling of your basement, soaking the walls, damaging furniture, and warping floors. Everything has to be torn out and replaced.
Your home insurance may have coverage for the water damage, but as for the cause of the damage—the dishwasher—it will not cover replacement costs. However, your home warranty might cover this, and your home insurance policy could cover the rest of the mess.
Home Warranties May Pay When Home Insurance Won't
Imagine you have a home inspection and reconstruction cost evaluation done by your home insurance company. The company discovers that a flickering light might mean the wiring needs work. Your home insurance tells you it is a potential fire hazard, and the insurance company asks you to do repairs to keep your insurance policy in force. Since there has been no accident, no sudden damage, nor any accidental damage, the home insurance policy will not pay for repairs or regular maintenance.
It's nice to have everything covered, but remember that the more that is covered, the more you'll pay in premiums.
After you get off the phone with your insurance company, you contact your home warranty company. It sends a professional to look at the situation because you bought a good servicing contract with many add-ons and coverage for the electrical wiring. The electrician identifies the source of the problem and what needs to be done. Your warranty company covers the cost of the necessary repairs, allowing you to keep your insurance policy without dipping into your pocket.
The Bottom Line
Home warranties and home insurance policies are similar products, but there are differences. Homeowners can certainly find it beneficial to maintain both an insurance policy and a warranty. However, like any insurance or warranty product, there are a lot of variables. It's hard to say definitively whether a homeowner should or shouldn't own both products, without knowing all the details of that person's situation.