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Home Warranty vs. Home Insurance: How They’re Different
By Joshua Rodriguez MONEY RESEARCH COLLECTIVE
Home insurance and home warranties. Both products offer peace of mind and the potential to reduce the cost of homeownership, but they cover you in different ways.
So what’s the difference between the protection you get with a home warranty and that of a home insurance policy? Read on to learn about each option and whether the coverage they afford make sense for you and your home.
Home warranty vs. home insurance: The purpose each serves
Home warranties and home insurance both potentially reduce the financial burden if you suffer a calamity at your home. But the perils they protect against are different.
A home warranty covers repair or replacement costs for your home’s system and appliances. It applies if a covered item fails due to normal wear and tear.
A home insurance policy protects against losses due to major incidents like fire, theft or severe weather. It also provides some liability protection in case of lawsuits involving the household.
A home warranty lessens the day-to-day expenses that almost every homeowner faces. A home warranty may reduce the financial impact if your water heater or dishwasher breaks.
Home insurance doesn’t cover those everyday costs, and a home warranty won’t take effect in case of disaster. Having one doesn’t mean you don’t need the other. It’s a matter of which threats you need to protect against, and how much risk you’re prepared to tolerate.
Still unsure about how you’re covered by a home warranty compared with home insurance? Let’s look further into what each product does and doesn’t cover.
What is home insurance?
Home insurance is disaster protection for homeowners. It provides financial assistance if a major incident damages your home or its contents, or if someone in your household causes injury or accidental damage to others.
There are four basic types of coverage in a typical policy:
- Structural coverage: Pays to repair or rebuild the home after covered damage
- Belongings coverage: Funds the replacement of personal belongings like clothing or furniture if those are destroyed or stolen. The limit is usually 50% to 70% of the total amount of insurance on the property
- Liability protection: Covers lawsuits due to injury or property damage caused by household members, pets or the home itself
- Habitability coverage: Pays for living expenses if your home is uninhabitable due to damage, or if your home is undergoing repair or rebuilding after a covered event
Every home insurance policy has a coverage limit and deductible. Your deductible is the amount, usually annually, that you have to pay out of pocket before your insurance kicks in. For example, if a fire in your home causes $50,000 in covered damage and your deductible is $1,000, you would pay that $1,000. The insurance company would pay the other $49,000.
So what does homeowners insurance cover? It depends on what caused the damage and what your policy includes.
What is covered with homeowners insurance coverage?
Homeowners insurance coverage is a package policy. It includes liability protection, which applies if someone in your family — including a pet — causes property damage or injury to others. If someone names that household member in a lawsuit, your homeowners insurance covers some to all of the damages.
Homeowners insurance also covers damage to property from covered events. Those include sudden disasters or incidents such as:
- Major storms
- Fallen objects
- Explosions
- Sudden plumbing accidents
- Theft
- Vandalism
Your homeowners insurance will provide financial assistance to repair or replace your home and belongings in case of such an event. When you file a claim, your insurer will calculate your payout in one of three ways:
- Cash value: The current value of your home and/or possessions, after subtracting for any depreciation in their value
- Replacement cost: The actual cost of rebuilding your home or replacing your possessions, given current prices
- Guaranteed replacement cost: The full cost of rebuilding the home to its previous condition, regardless of your policy limit
You choose one of these three options when you apply for your policy. Guaranteed replacement cost is usually the most expensive but has the highest payouts. A cash value policy has lower premiums but may not fully cover the repair or replacement of your belongings.
Water damage from weather events
Your homeowners insurance policy may cover certain types of water damage due to weather events. Covered events typically include:
- Hailstorms
- Snow and ice storms
- Severe rain
- Freezes
In case of these events, your insurance policy will cover non-flood-related water damage. That includes structural damage due to the weight of snow or from the force of rain that strikes or enters your home.
Structural damage from natural disasters and fires
Most natural disasters are covered events, except for earthquakes, floods, landslides and sinkholes. Fire and lightning are also covered unless someone intentionally sets the fire.
Wind damage
Most homeowners insurance covers wind damage. However, if your area is at high risk of severe winds, your insurer might charge a hurricane, windstorm or wind/hail deductible.
Wind deductibles may be a dollar amount — $500 per storm, for example — or a percentage of your insurance limit. Most other homeowners insurance deductibles are dollar-value only. Insurers set the deductible amount, but state law may apply limits and regulate when those deductibles apply.
What isn’t covered by your insurance policy?
Homeowners insurance does not cover damage from owner negligence. That includes mold damage or water damage due to unrepaired leaks. Most policies also exclude sewage backups, even if the backup comes from your town’s sewage systems.
A standard homeowners insurance policy also doesn’t cover flood damage. The only way to get flood coverage is to purchase a separate policy. You can buy flood policies from private insurers or the National Flood Insurance Program.
Likewise, homeowners insurance excludes damage from landslides and earthquakes. Private insurers sell earthquake policies, which you may want to consider if you live in an area with a history of seismic activity.
An earthquake insurance professional can provide detailed information for your area. If you live in California, you can get information from the California Earthquake Authority.
As intense weather events become more common, homeowners must consider disaster policies outside traditional risk zones. As hurricanes and tropical stories become more severe, for example, the areas that suffer serious storm damage are expanding, and homeowners who didn’t buy flood insurance in the past may now want to consider it.
Finally, certain high value-items fall outside of your homeowners insurance coverage. That includes collectibles and luxury items like jewelry, furs and artwork. Fortunately, you can protect these items by purchasing a special option called a floater policy.
What is a home warranty?
While home insurance policies cover disasters and other major incidents, from burst pipes to tornadoes, they won’t help you with ordinary home repairs like a broken water heater. For such coverage, you’ll need a home warranty.
A home warranty policy isn’t technically a warranty. It’s a service agreement in which a company agrees to cover the costs of repairing or replacing your home’s systems and appliances. In exchange, you pay a monthly premium and per-claim fees for service calls.
Service fees apply when you call the home warranty company to report an issue and have an inspector visit your home to investigate it. The fee contributes to the company’s cost to send someone to your home to assess the issue and determine the next steps.
What will your home warranty cover?
Home warranties cover typical repair costs, excluding those for preventive maintenance. They cover installed systems like your heating and cooling systems and select appliances.
Some policies divide system and appliance coverage into separate packages. For example, Liberty Home Guard offers Appliance Guard and Systems Guard packages. A combination Total Home Guard package gives you both types of protection at significant savings.
Other warranty companies have tiered coverage options that add benefits in exchange for higher premiums. For example, with American Home Shield, appliance repair is available at the Gold level and up. Standard subscribers only receive Systems coverage.
Built-in system repairs
Your home warranty covers repairs and replacements to your home’s integrated systems, such as:
- Central air conditioning
- Central vacuum
- Heating systems
- Electrical systems
- Internal plumbing
- Septic systems
- Water heaters
- Ductwork
Systems don’t include removable features and appliances. For that, you need a policy that includes home appliances.
Appliance repairs
Home warranties often cover larger appliances — the kind you wouldn’t take with you when you move. That usually includes your:
- Full-size refrigerator
- Dishwasher
- Laundry machines
- Stove
- Cooktop or range
- Garbage disposal
- Garage door opener
- Built-in microwave
In general, if something is built into your home and would be difficult to remove, it falls under your appliance coverage. Smaller appliances like toasters, countertop microwaves and blenders aren’t covered.
What coverage is not included with your warranty?
“What does a home warranty cover?” isn’t the only question to ask. There are multiple exclusions to consider, since home warranty coverage only includes damage from normal use. It won’t cover issues caused by misuse or negligence, including those caused by:
- Incorrect installation
- Non-repair upgrades or modifications
- Manufacturer defects
- Animals or pests
- Pre-existing defects
- Outdoor systems (sprinklers, sewer lines, power lines, etc.)
Companies decide whether any of these causes were in play, and so may deny claims if they deem that they were.
A warranty also won’t cover anything that a manufacturer’s warranty or home insurance would cover. For example, if a blizzard caused your roof to collapse and damage your electrical system, your insurance would be responsible for the fix.
Finally, your home warranty won’t cover secondary damages. Secondary damages are non-covered losses that happen due to a covered issue. For example, if a pipe bursts and the water damages your refrigerator, your home warranty won’t pay to fix the refrigerator.
How does your home warranty compare to your homeowners insurance?
Now that you understand the difference between a home warranty and home insurance, you might wonder how that affects your purchase decisions for these products. Here are what buyers need to consider regarding home insurance vs. a home warranty.
Yearly premiums
A typical home warranty costs between $40 and $58 per month, or $480 to $696 a year. Homeowners insurance averages $778 to $1,272 a year, according to the most recent data from the National Association of Insurance Commissioners.
Soon, many people could see their homeowners insurance rates increase due to climate change. In 2021, 18 major weather disasters cost insurers more than $1 billion each, and this price tag has companies taking steps to protect themselves.
Annual claim limit
Most home warranty companies have coverage limits. Some, like Cinch Home Services, have one cap for the entire policy. Other providers have per-item caps that vary by category.
Home insurance companies usually have per-claim limits. Different insurers calculate limits differently. Some use mortgages to determine coverage limits. Others base it on home value and market costs of real estate transactions.
Home insurance policies rarely have explicit per-year limits, but insurance companies pay attention to how many claims you file. Premiums could rise, or you could have trouble getting or keeping a policy if you have more than two claims in five years.
Additional coverage options
Home insurance and home warranty coverage both have multiple exclusions. You can close those gaps by purchasing add-ons.
Home warranty companies may offer additional coverage for systems and appliances that aren’t part of a standard policy. Those may include:
- Hot tubs and pools
- Well pumps
- Sump pumps
- Electronic devices
Home insurance companies also offer additional coverage you can buy to fill in gaps. Examples include water-backup coverage and extended reconstruction cost insurance, which helps if reconstruction costs more than expected.
Savings
A home warranty will save you money if repair costs in any year exceed your premium and service call fees. As with most household expenses, repair costs are on the rise. Owner spending on emergency repairs increased by 42% in 2021, for example, reaching an average of $2,231 per homeowner.
However, keep in mind that not every home will incur such average bills, which factor in some far-higher tabs, such as replacing furnaces and the like. And not all such spending is covered under a home warranty. Even if it is, you may not be willing for some expenses – like repairing an appliance – to wait for the required service call to approve warranty coverage for the repair. . In addition, warranty premiums and fees per service call would need to be deducted from your net benefits.
Home insurance can save you tens or hundreds of thousands if a disaster occurs. But its benefits, too, require factoring in the cost of premiums, and of covering an annual deductible that can easily reach $1,000. However, the potential benefit to home insurance is also far higher – up to the total insured cost of the home – than for the highest home warranty claim.
Do you need both home insurance and a home warranty?
Now that you know the differences between home insurance and home warranty coverage, you might wonder if one or both is worth the money. Let’s compare the cases for each.
Home insurance is typically mandatory if you have a mortgage or home equity loan. Many lenders require it. Otherwise, there’s no legal obligation to have home insurance, but it’s financially risky for most people to go without. After all, many, even most, homeowners could not pony up the hundreds of thousands, even millions, of dollars required to replace their home or to repair the damage from a fire or covered weather calamity.
By contrast, the expenses covered by a home warranty will be more affordable to many, even most, homeowners, where remedying trouble to household systems and appliances rarely runs into the thousands.. Yet carrying a warranty may provide peace of mind. That’s especially the case for those who may find it easier to pay a monthly premium to cover home systems and appliances than to risk incurring a bill to repair or replace one of them that could run to hundreds of dollars – or, on rare occasions, even to thousands.
In the end, every homeowner’s needs for financial protection are different. Talk to an insurance professional or financial advisor to find out what coverage makes the most sense for your needs.
