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If you're a homeowner or are about to close on a new house, you might be well aware that you need homeowners insurance. This is especially true if you have a mortgage— often, lenders will even require you to show proof of homeowners insurance. After all, you want to protect your home, since it's likely one of the largest purchases — if not the largest — in your life.
But what about a home warranty? Do you need this as well, and how is it different from homeowners insurance? Let's take a look.
What is a home warranty and what does it cover?
A home warranty protects appliances and home systems. Just how you might purchase a warranty for your cell phone or your microwave, you can purchase a warranty for your home.
A home warranty doesn't cover the walls and structure of your home. Rather, it covers the cost to replace or repair certain home systems — think the air conditioning, electrical systems, the HVAC, and water heaters — should they break down. In some cases, a home warranty might also cover home appliances, including those in the kitchen like microwaves and ovens.
You'll pay either a monthly or annual fee. Home warranties on new homes usually have coverage limits. For instance, appliances could be covered for the first year, along with paint and drywall, and the HVAC and plumbing systems could be covered for two years.
Read more: I always thought home warranties were a scam, but I used mine 3 times in a year and it saved me over $1,000»
Companies that offer home warranties
Because a home warranty is different than homeowners insurance (which we'll get into in just a bit), you'll need to purchase a home warranty from a company that specializes in them. You don't typically get a home warranty from an insurance company.
There are a handful of companies that you can get a home warranty from, including American Home Shield, Landmark Home Warranty, and Choice Home Warranty. Each have slightly different rules and limits, so you'll want to do your research and comb through the fine print.
How much do home warranties cost?
The cost of a home warranty depends on a number of things: where you live, the size of your home, the company that is providing the warranty, and the specific policy you choose. On average, a home warranty costs anywhere from $350 to $700 per year.
Besides the cost of the policy itself, there are a few fees to mind. For one, there's typically a service fee you're responsible for paying when contractors come to your home to fix an appliance or home system. This is typically $75 to $125.
Home warranties versus homeowners insurance
A home warranty isn't insurance; it's a service contract. And it doesn't typically cover structural issues.
Within the realm of homeowners insurance, dwelling coverage can replace or rebuild structures in the case of an accident or damage from a natural disaster — think a fire, damage from hail, objects falling on your roof, or windstorms.
Dwelling coverage can cover the cost of your belongings should they get stolen or damaged, and personal liability can cover legal and medical fees should someone get hurt on your property. And should your house be uninhabitable due to a covered accident or disaster, additional living expenses would cover costs of meals and staying at a hotel or Airbnb.
A home warranty usually is good for a specific period of time, while homeowners insurance provides coverage as long as you pay for it. Another difference: If you have a mortgage, homeowners insurance is mandatory, while a home warranty is optional.
Read more: After wasting $500 on my home warranty, I'm taking 2 steps to pay for repairs without going into debt
Pros and cons of home warranties
Pros
You could save money on repairs. Depending on the type of home warranty and length of the service contract, a home warranty could help cover the costs of repairing or replacing appliances and systems in your house. It could be a solid way to protect these parts of your home, and you'll pay less out of pocket for repairs.
Cons
Coverage limits. Home warranties usually have coverage limits. This amount might run the gamut depending on the company. For instance, there might be a $500 cap on what's covered to replace the electrical system, or there might be a $5,000 cap. And there are also usually limits on the total amount per year that can be covered for everything. For instance, you could be covered for up to $10,000 a year, or $20,000 a year on all repairs and replacements.
Exclusions apply. Your claim might also be denied due to a rule or exclusion. For instance, if the company you purchased a home warranty from determines that the issue with the appliance or home system was pre-existing, you might not get covered. Or let's say that the company argues that the fridge or microwave wasn't properly maintained. In this case, your claim might also be denied. You'll want to read up on the exclusions before signing up for a home warranty.
Pros and cons of homeowners insurance
Pros
Peace of mind. Homeowners insurance can provide peace of mind should your home be hit with a disaster or accident and there's expensive damage. Instead of paying out of pocket, your insurance will cover the costs. And if you need a mortgage, lenders require you to purchase homeowners insurance before they offer you a home loan.
Cons
Standard policies don't cover everything. Standard homeowners insurance doesn't always cover everything you need. For instance, if you live in a part of the country that is prone to earthquakes, you'll need to purchase a separate policy. The same goes with floods. You'll need to get a separate policy that covers flood-related damage.
Along the same lines, if you want additional coverage on standard homeowners insurance, you'll need to purchase an add-on, also known as a rider. For example, if you own art or valuable jewelry, a standard-content insurance policy might not cover those items.
Payouts vary by policy. The payout depends on your particular policy. And depending on your policy, you might receive a payout on the actual cash value, which is the cost to repair or replace something minus depreciation. And like other types of insurance, there's also a deductible you'll need to pay before homeowners insurance coverage kicks in.
A home warranty could be a great way to provide some peace of mind and save you money should an appliance or home system break down. However, you'll want to know all the rules, exclusions, and limitations before you make a decision. So be sure to do your due diligence, ask plenty of questions beforehand, compare warranties from different companies, and read the fine print.