Home Warranty vs. Home Insurance: Which Will Protect You Best?
What’s home insurance?
Home insurance is not only a great way to protect yourself against damage to your home, but it is also more often than not required by lenders to obtain a mortgage. Depending on your lender, they may need your home insurance payments to come out of an escrow account to ensure the proper amounts are being paid to protect their investment.
What does home insurance cover?
Home insurance covers you in the case of accidental or criminal damage to your home, similar to how your car insurance covers you if someone damages your car.
Home insurance generally covers you for very specific kinds of damage like vandalism, natural disasters like a tree limb damaging your roof during a storm, or damage caused by burglaries or theft. There are a lot of clauses and limitations to home insurance. Some of these are based on geography, and others are blanket exemptions from what insurers will cover. For example, if you buy a home in a designated floodplain, your insurer will likely not cover you for overland flooding. Similar to having a pre-existing medical condition, most home insurance providers will put exemptions in your policy for natural disasters that they view to be likely in your area based on past history.
The same goes for your deductible amount (the amount you must pay to make an insurance claim). If crime statistics show that you live in an area with a high theft or burglary rate, your insurer may require a higher deductible to discourage you from making an insurance claim for burglaries. Or another likely scenario is that the cost of your home insurance will be higher than that of a home in a neighborhood with lower crime rates.
What’s a home warranty?
A home warranty covers you for things that are not caused by damage either from an accident or criminal activity, like burglary or theft, but rather things that would otherwise be on you to pay for if they wear out or fail earlier than they should. In many ways, home warranties are complementary to, not an alternative to, home insurance.
What does a home warranty cover?
A good example is if one of your appliances is outside the manufacturer’s warranty period of six months and one of the components fails. This component would not be covered by standard home insurance because the failure wasn’t caused by damage to your home from a natural disaster or a criminal act. Without a home warranty, the cost of repairs would fall to you as the homeowner. Depending on the type of home warranty you acquire, things like appliances failing can be either fully or partially covered — either way, easing the financial burden on you.
To go back to our car insurance analogy, think of the difference between what a home warranty and home insurance covers, like automobile insurance and a manufacturer’s warranty. Insurance pays for insurance if you get in an accident and you need your bumper replaced. However, if one of your engine components wears out before it’s supposed to, that’s not something that insurance would cover. Instead, if you have a vehicle with a warranty still in effect, your warranty would cover a defect or an early failure. The same is valid with home insurance — if you have an electrician come in and do an upgrade in your home and, upon inspection, it turns out that the work is faulty, this isn’t something that a home insurer would be liable for. A home warranty would likely cover the cost to fix this, however.
Home warranty vs. home insurance: what’s the difference?
Aside from the differences in what’s covered by home warranties and home insurance that we discussed above, the most significant difference is that home insurance is mandatory until the value of your home is paid off, and home warranties are optional.
Home insurance is mandatory while you are paying for your home with a mortgage from the bank because it’s a way that the bank can protect its investment. The bank essentially owns that portion of your home when you have a mortgage. Therefore, they require that you have home insurance so that the value of their investment doesn’t decrease if there’s damage to your home.
Home warranties, on the other hand, are optional because the issues they cover are costs that fall squarely on the shoulders of the homeowner to cover and do not affect the home’s overall value.
Do I need both a home warranty and home insurance?
Home insurance and home warranties complement each other and have different functions, so if you can fit a home warranty premium into your budget, it’s ideal to have both policies.
An important thing to note is that because they cover different aspects of your home, having a home warranty will not lower your home insurance premiums.
One of the similarities between home insurance and home warranties is that if the insurance provider deems your home to be too high of a risk, they can decline to cover you altogether. While this is less of a problem for a home warranty, it will mean that you’ll be denied a mortgage by a lender for that particular property.
What is a home-builder warranty?
Just to throw another insurance-related piece into the puzzle, you may also be eligible for a home-builder warranty. If you’re purchasing a brand new home that has never been lived in, your home-builder may warrantee certain aspects of your home. What is covered by the warranty will vary between builders but will only cover construction-related aspects. For example, a general home warranty will cover your appliances, but a home-builder’s warranty will not. Builders’ warranties cover structural integrity and electrical and plumbing installation done by the builder or sub-contractors.
Home insurance and home warranties go hand-in-hand. The best way to ensure that your financial investments in your primary home systems and appliances are covered is to have both. While home warranties are optional, buying a warranty policy is a wise choice. The last thing you want is to pay out of pocket for repair after repair on aspects of your home that are not covered by home insurance but could have been by a home warranty. You can apply for a home warranty anytime, so plan to include this critical financial backstop in your budget when possible. Future you and your bank account will be happy that you did!