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Home Warranty vs Home Insurance

The differences between a home warranty and home insurance can be confusing. We lay it all out, below.

Last Updated: October 29, 2021

Owning a home is a great responsibility and an even greater investment, so it's smart to keep your home protected. The average 3 bedroom home contains nearly $25,000 in appliances and systems so it's important to know how to be covered in the case of an emergency.

Everybody has home insurance. But how does that differ from a home warranty plan – do you need one or both? Here are your home protection questions answered.

Home Warranty Vs. Home Insurance: The Basics

The purpose of home warranties and insurance are similar. Both help you manage risk. People pay for insurance to manage risks because a major, unexpected expense could be financially damaging. When you pay a company to manage your risk, you recognize that you may or may not have an expense that exceeds what you paid the company, but you get the peace of mind of knowing that you're covered if something devastating happens.

While both home warranties and home insurance are both designed to protect you from unexpected events, the type of coverage you will get is very different.

So, What Do They Cover?

Home insurance protects your home against things like fire, burglary, storms, and floods. It may also cover you if someone has an accident on your property. For example, if someone broke in and stole your TV and gaming systems, home insurance may cover that. If a flood destroyed your refrigerator and stove, then home insurance would take that claim as well.

On the other hand, a home warranty plan can cover some of the same items but under different circumstances. Home warranty plans usually cover appliances and home systems like HVAC or electrical. But they're not covering them from theft or damage as described above. Instead, they're covering you in case of breakdowns from normal wear and tear.

Some of the most commonly covered items include refrigerators, dishwashers, ovens, etc. Some plans will allow you to add electronics, septic systems, and other systems based on your home’s needs.

The reality is that appliances will break eventually. Home warranty plans help you plan for that risk and reduce the chances that you have a major unexpected expense when you can least afford it. They will repair or replace a covered appliance or system through their network of licensed and vetted professionals.

However, home warranty plans don't cover mistreatment and neglect-related issues, so it's essential to understand that you're still responsible for taking care of your appliances. The same is true with insurance. If you left an appliance out in the rain or failed to fix a leaky pipe, leading to rust damage, you can't claim flood damage when it stops working.

How Does the Application Process Work?

In both cases, you'll start by getting a quote by calling them or starting it online.

For homeowner's insurance, the price you pay may depend on the home's location and risk profile, how much coverage you want, how high your deductible is, and claims history. How far away you are from the nearest fire station or other emergency services can also be a factor.

According to Bankrate, the average cost of home insurance annually is $2,300 for a $300,000 home.

For a home warranty, they'll generally want to know the appliances you have, their ages, and whether they're in good working order. If any covered items have pre-existing conditions you know about, you'll need to tell them, as these typically aren't covered.

The average cost for a home warranty is $500-$750 annually, and you're probably more likely to use it in any given year too!

What Do You Do When an Incident Occurs?

In both cases, you'll file a claim, usually online.

An insurance company will ask for any police reports. Then they'll send out a claims adjuster to verify the extent of the damage. It may take a week or more for an insurance adjuster to arrive and complete their report.

But with a home warranty, a claim will usually result in a service call from a trusted, licensed technician in your area. Your warranty company will assess if it's an emergency and, if it is, will usually send someone out within hours. If it's not an emergency, then one to two days is a common wait time.

Home warranty companies only work with company-approved licensed contractors in your area so that you can count on the highest professional standards and skills. You meet with this contractor and allow them to inspect the appliance or system. They will assess whether it can be repaired or if a repair would exceed the appliance's depreciated value. In that case, they may give you an option to replace it.

What Is the Pricing Structure?

With both home insurance and a warranty, you can choose to pay a monthly premium or pay annually. Then when you need to file a claim, you will have only a nominal out-of-pocket expense.

For home insurance, this is called a deductible. You chose how high your deductible would be when you selected your insurance plan. It could be anywhere from $250 to $5000.

With a home warranty, you usually have a flat service call fee per incident. It's typically $50 to $150. Usually, if it's on the higher end, it's for a more complex repair call like sewage backup. But this will all be outlined in your contract so you know what to expect.

Read the contract!

What Is the Length of Contract?

Usually, you have homeowner's insurance on an ongoing basis from the time you purchase the home. You can choose to add a home warranty plan at any time after buying your home. Home warranties are on a 12-month cycle, and you can set them up for auto-renewal.

What Are Your Contractual/Legal Requirements?

If you have a mortgage, then you are required by the lender to have home insurance. If something were to happen to your home, this ensures that the lender can get their money back. This is also good for you because if you have a mortgage and something destroyed your home, you would otherwise owe the bank.

Lenders will not require you to get a home warranty. But there are some situations where getting one may be part of a contract. Sometimes home sellers will pay for a 1-year home warranty that they transfer to their home buyer. This is part of the home contract, making a purchase of the home more attractive to potential buyers.

A homebuyer might also ask for this to be added to the contract before they will sign it.

Home insurance vs. home warranties – they are two very different types of coverage. Adding a home warranty to your home could be a smart financial move for you and will save you from the headaches that come with an unexpected incident.