Homeowners Insurance vs. Home Warranty Coverage

Owning a home can be a risky venture, considering all the potential hazards. From burglars and hail storms to a furnace that suddenly breaks down in the middle of winter, there's a lot that can happen to your home.

Fortunately, you have options when you need a financial safety net. The two main policies that can protect you are homeowners insurance and home warranties. But it's important to understand the differences between them and when it makes sense to choose both types of policies.

What does homeowners insurance cover?

A homeowners insurance policy safeguards you and your residence from devastation and loss specifically caused by a set of listed perils.

For example, fire, theft, many types of natural disasters, acts of God, vandalism, accidents and other threats are typically included in a homeowners insurance policy. Your home's exterior and interior as well as personal property are typically covered. Additionally, this type of policy can protect you from liability if someone is injured on your property.

If you've taken out a mortgage loan to finance your home, chances are your lender requires you to have homeowners insurance to protect their interests and yours.

What does a home warranty cover?

By contrast, a home warranty functions as a service contract that typically covers essential appliances and systems within your home, providing repair or replacement if an included piece breaks down.

For example, many home warranty contracts cover plumbing, electrical, and heating and cooling systems, as well as the refrigerator, stove, oven, dishwasher, garbage disposal unit, and washer and dryer. You may purchase additional coverage for an extra charge, such as protection for your swimming pool or hot tub.

Contracts generally last 12 months and are renewable. The annual coverage fee often starts at $400, and the cheapest plans offer a basic level of protection, while more expensive plans provide more expansive coverage and lower out-of-pocket costs. Unlike a homeowners insurance policy, a home warranty plan usually doesn't require a deductible. Instead, you're charged a service call fee around $100 or more. Homeowners warranty coverage is purely optional and not required by your mortgage lender or anyone else.

What's the difference?

Homeowners insurance is meant to protect policyholders against damage to their personal property and damage to the home's structure, while home warranties cover mechanical equipment that needs to be repaired or replaced. Premiums for homeowners insurance tend to be higher because the insurer is taking on more risk.

Many homeowners find coverage gaps in their homeowners insurance policies, so you may consider getting both types of coverage.

For example, say a pipe bursts in your home. Your home warranty would cover the costs to repair the pipe but not damage caused by the leak. If the leak was major, your homeowners insurance would cover the damage.

Protection plan pros and cons

A home warranty can offer several benefits, including:

Financial coverage for defective appliances that need to be fixed or replaced in a timely manner.
A streamlined process in which the warranty company dispatches a service provider to your property.
Cheaper fees compared to the full expense of replacing or fixing an appliance.

However, home warranties can have their drawbacks, too:

Coverage limits on repairs and replacement costs, which may leave you paying some of the bill. The warranty company may also deny coverage if it determines the appliance has a pre-existing condition; was not properly installed, maintained or serviced; doesn't abide by area building codes; or was improperly used.
Potential extra fees for services outside the coverage limit, such as the cost for hauling away an old appliance.
You may need to take extra steps such as keeping receipts.
Limited network of service professionals. Warranty companies also usually do not reimburse you if you attempt to do the work yourself or enlist an outside contractor.

How to choose between insurance and a warranty

In theory, good home warranty coverage shields you from expensive repairs that homeowners insurance won't cover. However, warranty providers too often exclude assumed coverage for questionable reasons and subjective technicalities, making it difficult to recover the amount you pay into the policy. You also run the risk of getting substandard repairs from a provider you can't choose.

To determine if a home warranty plan is good for your situation, consider whether your appliances are already under a manufacturer's warranty. How much would it cost to repair or replace each of these? Compare these costs to what you would likely pay to a warranty company.

Warranty coverage is best for homeowners who lack cash reserves. But it won't make sense if you have a solid savings account or you're purchasing a new-construction home — unless the builder or real estate agent provides the warranty for free. You can also avoid buying the warranty plan or incurring large expenses if you regularly maintain your existing appliances.

Do your homework first

Prior to purchasing a home warranty plan, follow these tips:

Review the contract and terms. Make sure you understand what's covered and what's not.
Learn about the warranty company. Research your options and the company's service providers. Are they nearby; reputable; and licensed, bonded and insured? You can check their ratings at the Better Business Bureau.
Consult with your home inspector. This professional can tell you when the home's appliances and systems may fail and if warranty coverage is worth it for this particular house.