As a homeowner, you have made a significant investment in your future and you need to ensure that it’s properly protected. Every sensible homeowner already has home insurance and it’s easy to understand why they wouldn’t consider a home warranty to be important. This is a mistake; they are not the same, each is valuable in its own right and they both offer different ways to protect your home.
To ensure that you have full protection for your investment, it’s advisable to have home insurance and a home warranty. However, it is important to take a deeper look at both, what they cover, how they differ and answers to some FAQ’s to help you make an informed choice.
What is Home Insurance?
Let’s begin with the type of home protection that most people are already familiar with and that’s home insurance which is often referred to as homeowners insurance. This is property insurance that’s designed to protect against losses and damages caused by specific perils that are covered in the policy. A standard homeowners insurance policy will usually include four essential aspects of coverage.
Structural
This will cover the structure of the home to make repairs or rebuild if it is damaged or destroyed by a peril that’s covered, The majority of modern policies will also cover additional structures on the property, such as: garages, decks, tool sheds, gazebos and more.
Personal Belongings
This covers furniture, clothing, sports gear and other types of personal belongings in the event of a theft or destruction caused by a covered peril. Certain expensive items, such as: jewelry, watches and designer gear may require a personal property endorsement or floater to ensure that you have adequate coverage.
Living Expenses
This will pay for any additional living expenses that could be incurred by a covered peril, such as: hotel stays, meals and more. This will be important if your home is uninhabitable until it can be repaired or rebuilt.
Liability Coverage
This will protect you against lawsuits for injuries and property damage that the policyholder, their family and even their pets may cause to others.
What Does Home Insurance Cover?
A home insurance policy is typically a more comprehensive source of cover than a home warranty which tends to be more specific in nature. There are six key areas that you need to understand.
Dwelling Coverage
This is the core of a sound home insurance policy and it offers financial protection against damage caused by fires, storms, hail and other perils. The homeowners insurance policy will encompass the main home structure and it could include attached components too.
Other Structures
Beyond the limit of the main home the policy may cover certain other structures on your property, such as: garages, sheds, gazebos, fences and more.
Liability Protection
This covers any injury or damage that may be inflicted on others due your actions or property. This is essential to protect you and your family from financial repercussions that can be expensive to fix. By its nature this cover is expansive and it can include harm caused by your pets. It’s important to understand that certain breeds or types of pets may be excluded by many insurance providers.
Personal Property
As we mentioned earlier, homeowners insurance may extend to your property, such as: furniture, clothing, electronics, outdoor plants and more. This is true even if these items are not on your property. Those that have expensive items, like jewelry, art, antiques and more, should schedule personal property coverage on their policy.
Additional Living Expenses
This coverage will manage any additional costs incurred due to a temporary location if the covered peril makes your home uninhabitable. This will be true up to a predefined limit and it can include hotel bills, meal expenses, travel costs and more.
Guest Medical Payments
This will cover any accidents on your property that affects a visitor and it can cover immediate medical expenses.
What are the Exclusions and Limitations?
The HO-3 is the most common homeowners insurance policy and it offers protection from sixteen named perils. But, there are exclusions and limitations that are usually found in the HO-3 and other policies that you need to understand.
- Wear and Tear: Over time certain appliances and systems will fail due to age and it’s unlikely that a homeowner’s policy would cover repairs and general maintenance.
- Pests: Many insurers will exclude damage caused by termites, rodents and other pests. This is also true with home warranties and you may need to source a separate warranty with a pest control company.
- Flood Damage: This is typically excluded and you will need to add a flood insurance policy as a supplementary.
- Earthquakes: This includes mudflows and landslides and homeowners in places where this is a risk should purchase additional earthquake insurance or get an earthquake endorsement added to their policy.
- Mold: Most home insurance policies offer no cover for any damage caused by mold unless an additional endorsement is added.
- Home-based Business: If you are working from home you should consider a business owner’s policy. This will give you cover if a client has a mishap in your home office and then decides to sue you for their medical bills.
- High Value Belongings: Most standard home insurance policies offer cover for your belonging, but there will be payout limits. So, if you have expensive items, such as: artwork, rarities, antiques and other items you will need an endorsement to get more coverage.
The home insurance policy will cover personal liability for injuries to those that don’t live with you and their belongings while they are visiting your property. Some common examples include: intoxicated guests, falls, dog bites, injuries to workers and more. If there is an outstanding mortgage loan the lender will require you to have a home insurance policy. There must be sufficient coverage to satisfy the terms of the loan agreement.
What is the Cost of Home Insurance?
The insurance premium will vary depending of a number of key factors.
- Where you reside.
- The rebuilding costs.
- The personal belongings value.
- Your credit status.
- Your marital status.
- The deductible and coverage limits.
- Your past home insurance claims.
- The size, features and condition of your home.
The home structure can affect the cost of home insurance. If masonry is used in the foundation and there are other features that can make the home more resistant or vulnerable to damage this can lower or raise the costs.
The deductible can make a huge difference to the annual insurance premium. The costs can be influenced by your pets and this is especially true if you have a dog breed that’s classified as “dangerous”.
Certain insurance companies will exclude any liability coverage for certain dog breeds, such as: Akita, Chow, Great Dane, Rottweiler, Presa Canario, Doberman Pinscher, Alaskan Malamute, German Shepherd, Staffordshire Terrier, Siberian Husky, Wolf Hybrid and the Pit Bull. If your insurer can’t cover your dog, you need to look for an umbrella policy or dog-specific liability insurance.
What is a Home Warranty?
This is a less understood form of protection for your home. Essentially it’s a service contract that helps to fund repairs and replacements for home systems and household appliances. There is usually a monthly or annual fee and in return there’s a flat rate charge on service calls.
When a system or appliance that’s covered by your home warranty fails, the company dispatches a technician to diagnose and fix the issue. There may be a service call fee to pay and most home warranty plans have coverage limits.
For example: the contract could cover up to $2,000 per year for eligible appliances and have an annual claim limit of $15,000. A home warranty can be received as part of the real estate transaction when you purchase your home. But, if you buy the warranty for a home you own already it may take 15-30 days for the coverage to begin.
What Will the Home Warranty Cover?
These warranties can cover systems and appliances in new and pre-owned homes. There are three common types of home warranty plans.
- System Plans: These will include plumbing, electrical and HVAC systems.
- Appliance Plans: These cover the washer, dryer, refrigerator and dishwasher.
- Combination Plans: These cover everything in the system and appliance plans.
Many home warranty companies will offer extra coverage for things that are excluded from their standard plans for an additional fee, such as: wells, pools, spas, lawn sprinklers, septic systems, saunas and more. But, you need to take care that you don’t purchase a warranty that charges more to cover items that you don’t own. If you don’t have a pool or sauna, you shouldn’t be paying for warranty coverage for them. It’s a better ideal to choose a standard combination plan and then add-on cover for the items that you do own.
What are the Exclusions and Limitations?
The exact exclusions and limitations of a home warranty plan will vary depending on the company. So, it’s important to read the contract before you sign up to understand what is covered and the full extent of any exclusions and limitations.
- Pre-existing Conditions: If you have an appliance or home system that already has a problem prior to signing the contract it will not be covered. This will be identified with a visual inspection before the coverage commences. But, if you don’t know about the problem before the plan begins you may be covered when the appliance or system fails later.
- Cosmetic Damage: A scratch on a surface or a chipped tile will not be covered unless it will lead to serious structural damage.
- Pests: Certain warranties will cover pest removal, but this doesn’t extend to any damage caused by rodents, termites and other pests.
- Acts of Nature: If you have appliances and systems that are damaged in fires, hurricanes, snowstorms and other acts of nature you will be relying on your homeowners insurance coverage and not your home warranty plan.
- Misuse: If you’ve caused damage to a home system or appliance by using in a manner for which it wasn’t intended you are probably not covered by the warranty.
- Accidental Damage: The home warranty will cover damage caused by general wear and tear or an improper installation. But, for accidental damage caused by a specific event you need home insurance coverage.
- Solar Power Systems: These are typically not covered by the home warranty plan.
- Manufacturer’s Warranty: If the home system or appliance is still under the manufacturer’s warranty you would use that rather than your home warranty to make the repairs or get a replacement.
What is the Cost of a Home Warranty Plan?
This will vary depending on a number of factors, but there are two typical fees that you need to consider.
- The Monthly or Annual Fee: This is charged to get access to discounted service calls. It will vary depending on the type of plan and where you live. As you might expect, a comprehensive combination home warranty plan will cost more.
- The Service Fee: This is an out-of-pocket expense that you need to pay for each service call to fix an appliance or home system that’s covered by your plan. Generally speaking, a higher monthly or annual fee will lower the service fees.
The key difference between a new home builder warranty and a home warranty is that the former covers aspects of the newly built home, such as: concrete floors, plumbing and electrical systems. The home warranty is a service contract to fix or replace the items in an existing home.
The Key Differences Between Home Warranties and Home Insurance
Each plan or policy is designed to offer you protection for your home. But, the protection is quite different upon closer examination. A home insurance policy is focused on damage that can occur to the home and surrounding structures. However, it will not cover things like home appliances, equipment and other systems.
With a home warranty, you can get these issues repaired or have items replaced at lower costs. This is useful when you buy a major-ticket item for your home, such as: an HVAC system, refrigerator or a water heater. After the manufacturer’s warranty has expired, some protection is advisable in the event of a failure. When you look at the costs or repairs or replacements in comparison to the cost of a home warranty plan, it starts to look like a bargain.
For many homeowners, a home warranty plan makes perfect sense as a supplement to their home insurance policy. The varying levels of coverage can ensure that the home, the occupants, visitors, its systems and key appliances are protected. There may be limitations and exclusions to consider and adding extra insurance coverage may be necessary in some cases.
FAQs
Do I Need Both?
The short answer is yes. Many lenders will require that you have homeowners insurance for the entire duration of the mortgage to protect their investment. So, if you are still paying a mortgage, you will need a home insurance plan. If you already own your home, it’s up to you if you have home insurance, but it can be valuable if your home is damaged or destroyed. A home warranty is not a legal requirement and most lenders won’t care about it. So, it’s your choice if you feel like it’s a priority to reduce the potential costs of repairs and replacements.
What are the Main Differences?
The home warranty will cover repairs and replacements for existing systems and appliances due to wear and tear. This will include the electrical and plumbing systems. The homeowners insurance offers protection against specific sudden events that are unforeseen, such as: vandalism, fires, thefts and more. The homeowners insurance will not cover normal wear and tear, but the warranty will and vice versa.
| Feature | Home Warranty | Home Insurance |
|---|---|---|
| Purpose | Covers repairs/replacements of home systems and appliances due to normal wear and tear | Covers damage/loss due to unexpected events like fire, theft, or natural disasters |
| Coverage | Major home systems (HVAC, plumbing, electrical) and appliances (fridge, washer, oven, etc.) | Structural damage to the home, personal belongings, and liability protection |
| Required? | Optional | Usually required by mortgage lenders |
| Claim Process | Homeowner submits a claim; warranty provider sends a contractor | Homeowner submits a claim; insurance adjuster assesses the damage |
| Best For | Homeowners wanting coverage for aging systems/appliances | Homeowners needing protection from major damages and liability |
A home warranty can cover some of the costs when a major household system or appliance fails. The home insurance policy will cover your personal belongings and home against a wide variety of sudden threats and perils. As an added bonus, it will offer a certain amount of personal liability coverage too.
Most lenders will require that you have a homeowner insurance policy in place for the entire duration of the mortgage. This is not the case with a home warranty plan, but it still makes sound financial sense when you consider the potential costs or repairs and replacements. Think of home insurance as a must-have and a home warranty plan as an additional layer of protection.
Many modern home systems and appliances are prohibitively expensive to fix or replace after the manufacturer’s warranty has expired. So, for that extra peace of mind it’s understandable that many savvy homeowners choose homeowners insurance and a home warranty plan that fits their needs and budget. This ensures that they can avoid any nasty surprises when something goes wrong in the home.
