Home Warranty vs. Home Insurance: What’s the Difference?

In today’s market, owning a home comes with a whole new set of challenges. Rising costs for everything from materials to labor can turn a minor repair into a major financial blow. That’s where a home warranty comes in, and in 2024, it’s a smarter investment than ever for homeowners.

The Basics of Homeowner’s Insurance

As they say in the commercial, “should disaster strike” your homeowners insurance policy covers your property and everything on it. Your property and belongings are also protected from major disasters like fire, theft, and weather events. It can even cover additional living expenses if your home becomes uninhabitable and provides liability protection in case someone gets hurt on your property.

Choose Your Home Insurance Coverage

Homeowners can choose between “actual cash value” or “replacement cost” coverage. The former pays out what your property and possessions are worth minus any depreciation. While the latter, which is more expensive, pays the full cost of replacement.

You can also get extended coverage — usually 20 to 30 percent on top of your original policy — to cover any increases in the cost of materials and labor. Depending on where you live, you may be required to purchase additional flood, fire, or earthquake insurance.

Homeowners insurance protects your home and belongings in a variety of ways, but it’s important to understand what it typically covers and what it doesn’t. Here’s a breakdown:

Covered by Homeowners Insurance

• Dwelling structure: This covers the physical structure of your home, including the walls, roof, foundation, and attached structures like a garage.
• Personal belongings: This covers your furniture, appliances, clothing, electronics, and other valuables inside your home in case of damage or theft.
• Additional living expenses: If your home becomes uninhabitable due to a covered peril (like a fire or weather event), your insurance can help pay for temporary housing and living expenses.
• Liability protection: This protects you if someone gets injured on your property and decides to sue. It can also cover legal fees associated with the lawsuit.

Common Perils Covered by Homeowners Insurance

• Fire and lightning
• Theft
• Windstorm and hail
• Vandalism
• Explosions
• Riots
• Smoke damage
• Aircraft or vehicle damage

Not Covered by Homeowners Insurance

• Flooding: Flood damage typically requires a separate flood insurance policy.
• Earthquakes: Earthquake insurance is usually an add-on policy to standard homeowners’ insurance.
• Normal wear and tear: Homeowners insurance isn’t meant to cover the gradual breakdown of appliances or systems due to age.
• Maintenance issues: If a problem arises from a lack of maintenance (like a clogged drain), your insurance likely won’t cover repairs.
• Pest infestations: Damage caused by termites, rodents, or other pests typically isn’t covered.
• War and nuclear hazards

Home Warranty vs Home Insurance 101: While home insurance is a requirement, a home warranty is not.

A home warranty policy protects you from unexpected costs that may arise after your closing. Depending on the particular policy, your home warranty may cover electrical, plumbing, heating, cooling, washer, dryer, and any kitchen appliances that came with house if they malfunction or stop working entirely.

Warning, though — your home warranty won’t fix everything. Faucet repairs, outdoor sprinkler systems, or spas are generally not covered. Some policies don’t cover refrigerators, washers, dryers, or garage door openers., while another policy may pay to bring electrical or other systems up to code. You may be able to add specific items to your policy but it will cost you more.

American Home Shield was the first company to offer a home warranty policy back in 1971. Today, there are hundreds of companies providing this unique product and service. Generally home warranty policies cost anywhere from $300 to $500 annually. Ask your real estate agent for a recommendation and how the costs may vary for a home warranty vs home insurance.

What Happens When Something Breaks?

When something breaks in your home, the last thing you want to do is spend hours researching qualified repair people. Home warranty companies typically have two options:

• Pre-approved network: The warranty company will have a network of pre-approved contractors in your area. They will send one of these contractors to diagnose and repair the problem.
• Your choice (with approval): Some warranty companies allow you to choose your own contractor, but they will likely require pre-approval from the warranty company to ensure they meet their qualifications.

Repayment and Your Responsibility

• Service call fee: Regardless of which contractor option you choose, you’ll typically be responsible for a service call fee. This fee is outlined in your warranty agreement and is usually less than $100.
• Repairs and replacements: The warranty company will cover the cost of repairs or replacements for covered components, up to a set limit outlined in your plan. There may also be a lifetime cap on payouts.
• Not everything is covered: Make sure you understand what your warranty excludes (see bulleted list below). You’ll be responsible for any repairs or replacements not covered by the warranty.

Typical Home Warranty Coverage

• Appliances: refrigerators, ovens, cooktops, range hoods, dishwashers, garbage disposals, washing machines, dryers
• Systems: heating systems, air conditioning systems, electrical systems (up to a certain point), plumbing systems (up to a certain point)

Typical Home Warranty Exclusions

• Cosmetic repairs
• Damage caused by neglect or improper maintenance
• Pre-existing conditions identified in a home inspection
• Code violations
• Outdoor appliances (sprinkler systems, pools, spas)
• Specific appliance exclusions (check the plan details)

Turn the Unexpected into Predictable

Sure, there’s a monthly or annual cost associated with a home warranty. But compared to the potential financial gut punch of a major appliance or system failure, it becomes a very manageable expense. A home warranty helps you budget for homeownership by turning unexpected repair costs into a predictable monthly expense.

Make Informed Choices

When all is said and done, it is clear that a home warranty and homeowners insurance have the potential to offer distinct types of protection for homeowners.

Home warranties cover the repair and replacement of household appliances and systems due to everyday wear and tear, while homeowners insurance protects against major perils like fires, windstorms, and theft, as well as providing liability coverage.

Do your research, compare plans, and consider adding either or both options to your homeowner’s toolkit. Your future self will thank you!