Home insurance and a home warranty are ways you can protect your home and your finances. Should your home undergo damage from a natural disaster, theft, or some other form of harm, these coverages can protect you and save you from having to cough up thousands of dollars at a time.
But what’s the difference between home insurance and a home warranty? What do they cover? Do you need to buy both? It’s important to understand these terms so you don’t overpay or underpay for these protections.
What is a home warranty?
A home warranty is a form of coverage that protects the systems inside your home and your appliances and repairs or replaces them in the event that they’re damaged or broken. Here are some common items a home warranty covers.
Heating and cooling
Even with proper upkeep and care, heating and cooling systems wear out. Whether you have a furnace, air conditioner units, or a central air system, these things sometimes need repairs or replacements if they are damaged or break down. A home warranty will cover these repairs or replacements, as they can tend to add up fast and become large out-of-pocket expenses.
Appliances are something we use every day. When we cook, clean, do laundry, and wash the dishes. Should an appliance break down, a home warranty would cover the amount it cost to hire a service person to examine and diagnose the issue and fix it or replace it entirely.
Plumbing and electric
Think of your plumbing and electrical systems. Your plumbing services more than just your toilet. Your shower, your sinks, and your water system are largely dependent on your plumbing too!
Your electrical system is responsible for powering your appliances and the rest of your home. Should a power surge, or power outage happen and cut off your electricity or damage your electrical system, a home warranty would cover the expenses to fix or replace the system.
How a home warranty works
When you think of the word warranty, you may think of your cell phone’s two-year warranty, or a warranty on an appliance you have. A home warranty is similar to this kind of warranty, but it also has key differences. Let’s break down how a home warranty works.
When you have a home warranty, you have coverage for part of the costs if an appliance or system breaks down due to normal wear and tear. If something breaks down, instead of calling a repairman or a service provider to fix it, you would actually call your warranty provider.
How much does a home warranty cost?
Like any other insurance, the cost of a home warranty isn’t a blank check to fix broken appliances, and these costs aren’t a flat rate. Here are some of the factors that influence how much your home warranty costs.
Your home warranty premium is the amount you pay each year to keep your warranty protection. Depending on which warranty provider you choose to use and the extent of your protection, this amount may be anywhere from $300 to $600 a year. This rate typically stays the same, unless you add possessions or appliances onto your warranty.
Just like a deductible for your car insurance or home insurance, your warranty’s deductible is the amount you will pay out-of-pocket when an appliance or system does need a repair. Typically, this amount is fairly low since the cost of repairs or replacement won’t be too expensive. It varies with warranty companies, but this cost can be anywhere from $60 to $100.
What is home insurance?
Home insurance differs from a home warranty in quite a few ways. Let’s talk about the key differences between the two.
Homeowners insurance is protection for your home in the case of damage to your home’s structure, theft or damage to your property, or liability if a person is injured inside your home. Homeowner’s insurance is very important. Without it, you could face hundreds of thousands in repair or rebuilding costs if a fire or storm destroyed your home.
Homeowners insurance is not a requirement by the state however it is required by mortgage lenders. Your lender likely has a minimum amount of homeowners insurance to protect their assets while you’re paying them back your mortgage loan. Even if you have this minimum amount of homeowners insurance, you may still need more.
It’s a good idea to get enough homeowners insurance to be able to completely rebuild your home in the worst-case scenario. This factors in construction costs, the square footage of your home, what style home you want, and additional expenses like garages and sheds. It also factors in living expenses while you find a temporary space to live until your home is rebuilt.
It can be tricky to add up these expenses sometimes, so talking to your local real estate agent will help you assess the actual market value of your home and what it would cost to rebuild.
3 levels of coverage
There are three levels of home insurance coverage to choose from.
- Actual cash value
Actual cash value, or ACV, coverage offers payment for any lost items or damaged systems and pays the amount it’s worth today. So, let’s say you bought a brand-new washing machine eight years ago and it suddenly kicks out. If you have actual cash value replacement, your insurance won’t pay you the same amount you originally paid for it. They would just pay you what it’s worth today.
This is generally the cheapest annual premium, but many people choose replacement costs instead because of the better coverage.
- Replacement cost
Replacement cost is a form of home insurance coverage that pays to completely rebuild or replace an item or home. In this level of coverage, depreciation values won’t affect your insurance coverage, so even if your home is old, your insurance will still pay what you paid for it until you hit your policies’ limits.
- Guaranteed replacement cost
A guaranteed replacement cost is the highest form of coverage. This insurance pays to completely rebuild or replace your home after a disaster no matter what your policy limits are, and they promise to make it exactly as it was before the damage.
Should building costs skyrocket and exceed your policy limits, insurance will still cover materials. However, this form of insurance will not pay for you to upgrade your home’s codes unless you purchase an add-on for your policy.
Another form of the guaranteed replacement cost is an extended replacement cost. This form only pays a certain amount over your policy limit. For instance, let’s say your home insurance is $100,000. If you have an extended policy, your insurance may go 20% or 25% over this policy, so you will have an extra $20,000 to $25,000 of coverage until you have to pay out-of-pocket.
Do I need both?
The simple answer is—yes! Although neither are required by law like car insurance, homeowners insurance and a home warranty are the best ways to protect you and your home. If an appliance breaks and you don’t have homeowners insurance, the cost to repair and replace it can be up in the thousands. And, unfortunately, appliances break all the time.
In the same way, homeowners insurance is the best way to protect your home from outside damage and theft. This covers you in the case of weather-related accidents, disasters, damage, and even injury to a guest or visitor inside your home. If you don’t have homeowners insurance and your home undergoes fire damage or you face a lawsuit from a person who was injured in your home, you can quickly become overwhelmed with expenses.
As a homeowner, it’s wisest to invest in both of these forms of coverage as they protect different aspects of your home and ultimately serve to keep you safe! Plus, having these forms of protection ensures that even if the worst does happen to your home, you’ll be in the best hands.
Things to know
Here are a few things to know when shopping for a home warranty.
If home insurance covers an appliance breaking, your home warranty won’t cover it. For instance, if fire damages your plumbing or electrical system and your home insurance covers it, your home warranty won’t offer coverage.
It’s also important to note that some warranties have a cap. When talking to warranty companies, be sure to ask about limits and other plans offered if you think you need more coverage.
To recap, home insurance protects the structure of your home and the outside building itself from weather damage, fire, and other damages. A home warranty protects the items and systems inside your house from damage. This would include your plumbing, electric, heating and cooling, and appliances. While they’re different, they are both an important factor of your home’s protection.