Property Protectors: Homeowners Insurance vs. Home Warranty

Whether you own a house or are planning to buy one, you may be considering a home warranty and homeowners insurance and pondering the difference between the two. Both are important tools that can reduce the potential risk and unexpected financial burdens of home ownership.

But while the distinction between the two might seem ambiguous, home warranties and homeowners insurance serve entirely different purposes. To make an informed decision regarding whether you need one or the other, you need to understand the differences.

A home warranty is not a replacement for homeowners insurance. A home warranty covers service, repair, and replacement of home systems such as HVAC, electrical, and plumbing. It can also cover major appliances. Home warranties spell out what they include in the contract, and some are more robust than others.

By contrast, homeowners insurance covers damages or loss due to known perils, which could include wind, fire, vandalism, hail, or theft. More comprehensive home insurance plans, which are referred to as “all-risk,” extend beyond these basic perils and have fewer exclusions.

What Does a Home Warranty Cover?

The mechanical systems and appliances in your home have a lifespan. They are not designed or built to last forever. When a system or appliance breaks, the cost to repair or replace it can be a sudden financial strain. A home warranty reduces the risk of getting hit with the bill for a big-budget item by providing service, repair, or replacement due to normal wear and tear on major built-in household appliances and systems.

Most home warranties cover appliances such as dishwashers, ovens, and refrigerators (but, for example, not always the ice maker). They also generally cover major systems including HVAC, plumbing, and electrical. Many home warranties provide optional add-ons to cover systems that not every home has, such as pool pumps, septic tanks, and well pumps. You can also purchase cafeteria-plan home warranties that only cover certain items. Don’t expect a home warranty to cover cosmetic defects, such as a scratch on your stainless-steel appliance.

Warranties are entirely optional, and typically involve your home’s major systems (electrical and plumbing) and standard appliances. They last for a predetermined period of time, and they offer various yearly or monthly payment plans. The cost can drastically vary depending on what you want to be covered and how much you are willing to spend. The more extensive the warranty, the higher the price will be.

A home warranty covers exactly what is included in the contract. So, when buying a home warranty, read the fine print and be sure that the systems and appliances you are concerned about are listed as covered assets. Note parts of these items, such as a refrigerator’s beverage dispenser and water line, which may be excluded from coverage.

What Does Homeowners Insurance Cover?

Home insurance coverage varies depending on the type of policy. A named-peril policy is basic coverage that provides financial protection in case of events such as fire, theft, wind, hail, or vandalism. An all-risk homeowners insurance policy offers expanded coverage [SL1] with fewer exclusions. You’ll pay a higher premium for a more robust homeowners insurance plan, but once you suffer a loss, you’ll find there is no such thing as too much insurance—although when paying for a policy, you might feel like you have reached a sufficient limit.

A quality home insurance policy will not only cover damage to property, but also liability for injuries to guests on your property. Homeowners insurance also covers damage caused by natural disasters, with some exceptions. Flooding, earthquakes, wear-and-tear, and vermin damage aren’t covered in a standard homeowners policy.

You can expect a basic homeowners insurance policy to cover the home structure, personal belongings such as furniture or personal items, personal liability, and additional living expenses if you can’t live in your home because of damage from a named peril (fire, wind, etc.).

Is It Worth It?

Anyone who owns a home should purchase homeowners insurance (and if you rent a home, apartment, or condo, you should purchase renters insurance).

Homeowners insurance isn’t required by law, but lenders will require you to buy a policy; just as your home is probably your biggest asset, your mortgage is also a big asset for your lender. If your home is destroyed in a fire or weather event, everyone loses.

In the case of theft or vandalism, the mortgage company probably won’t be affected, but you’ll have to pay out of pocket if you don’t have home insurance. Even if you own your home outright, homeowners insurance is your best protection in case of a total loss, which could make it impossible for you to rebuild without financial assistance.

Beyond insuring the home structure, standard homeowners insurance policies also insure your belongings in case of a disaster and offer liability protection in the event of an injury or a property damage lawsuit. The most common liability claims involve dog bites, home accidents, falling trees, intoxicated guests, and injured domestic workers.

Homeowners insurance doesn’t cover everything in your home and doesn’t include normal wear-and-tear. In fact, it may be quite basic and cover only known perils (fire, wind, hail, vandalism, and theft). When buying homeowners insurance coverage, understand the exclusions—what is not covered.

The decision to purchase a home warranty should be independent of the existence of homeowners insurance because the two do not offer the same type of protection. While homeowners insurance is essentially a requirement for borrowing (though not a legal requirement), a home warranty is entirely optional. You might choose to buy a home warranty or decide you don’t want the additional coverage.

A home warranty may make the most sense if your appliances and systems are no longer covered by a standard warranty, at risk of breaking down, or if they would be prohibitively expensive for you to replace. But as long as you own a home, you should invest in homeowners insurance to safeguard your residence against the unknown.

Before you buy either a home warranty or a home insurance policy, read the fine print so you know exactly what it will—and will not—cover. If it doesn’t fit your needs or your budget, find a policy that will. That way, you can avoid any surprises if something goes wrong.

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