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Home Warranty vs. Home Insurance

If you own a home or are planning to buy one, you may be wondering what the difference is between a home warranty and home insurance. After all, both protect your investment and your wallet should something go wrong. However, home warranties and home insurance policies offer distinct types of protection. Knowing what each covers can help you decide if you need both.

Key points to remember

  • A home warranty provides discounted repair and replacement services for home appliances and systems, such as HVAC, plumbing, and electrical systems.
  • Home insurance protects your home and belongings against major perils like fire, windstorms and theft. It also provides liability protection if someone is injured while on your property.
  • If you have a mortgage, your lender may require you to purchase a home insurance policy. A home warranty is optional.
  • For the greatest peace of mind, consider purchasing both a home warranty and a home insurance policy.

Investopedia / Sabrina Jiang

What is a home warranty?

A home warranty is a service contract that helps pay for repairs and replacements of covered appliances and home systems. In exchange for a monthly or annual fee, you benefit from a flat rate on service calls.

If a device or system covered by your plan fails, your home warranty company sends a technician to diagnose and fix the problem, and you only pay the service call fee. Of course, these plans have coverage limits: one contract can cover up to, say, $1,500 per year for each eligible device, with an annual claim limit of $15,000.

If you receive a home warranty as part of a real estate transaction, coverage usually begins as soon as you close on the home. However, if you buy warranty for a home you already own, you may have to wait 15-30 days for coverage to kick in.

What does a home warranty cover?

Residential warranties cover appliances and systems in new and used homes. Most home warranty companies offer three types of plans:

  1. Appliance plans (for example, washer/dryer, dishwasher, and refrigerator)
  2. System plans (for example, HVAC, plumbing, and electrical systems)
  3. Combo plan (everything included in device and system plans)

Most companies allow you to add coverage (for an additional fee) for specific items that are excluded from standard plans. Common “add-ons” include swimming pools, hot tubs, septic systems, wells, lawn sprinkler systems, and additional appliances (eg, a second dishwasher or air conditioner).

How much does a home warranty cost?

The costs of the home warranty are based on two fees:

  1. A monthly or annual subscription. This is what you pay to access discounted service calls. Depending on where you live and the plan you purchase, you could pay anywhere from $350 to over $1,100 per year.
  2. Service charges. This is the amount you pay each time you request repairs for a covered device or system. Most companies offer several “levels” of service charges, which can range from around $55 to $150 per service call. In general, the lower the service fee, the higher your monthly or annual fee will be, and vice versa.

What is home insurance?

Home Insurance (aka, home insurance) is a type of property insurance that protects against loss and damage caused by covered perils. According to the Insurance Information Institute (III), a standard home insurance policy includes four essential types of coverage:

  1. Coverage of the structure of the house: This pays to repair or rebuild the home if it is damaged or destroyed by a covered peril. Most policies also cover other structures on the property, such as garages, tool sheds, decks and gazebos.
  2. Personal Effects Coverage: This covers your furniture, clothing, sports equipment and other personal effects if they are stolen or destroyed by a covered peril. If you have expensive items, you may need a special personal property endorsement or float to make sure you are sufficiently protected.
  3. Public liability : Liability coverage protects against lawsuits for injuries and property damage that policyholders, their family members and their pets cause to other people.
  4. Additional living expenses: This pays for hotels, meals and other living expenses if your home is uninhabitable due to a covered peril.

What does home insurance cover?

The most popular home insurance policy is HO-3, which covers your home, your belongings and your liability. According to the III, HO-3 policies provide broad coverage and protect against 16 disasters and perils: 

  1. fire or lightning
  2. Storm or hail
  3. Blast
  4. Riot or civil unrest
  5. Aircraft damage
  6. Vehicle damage
  7. Smoke
  8. Vandalism or malicious mischief
  9. Flight
  10. Volcanic eruption
  11. falling object
  12. Weight of ice, snow or sleet
  13. Accidental discharge or overflow of water or steam from a plumbing, HVAC or fire protection sprinkler system, or household appliance
  14. Sudden and accidental tearing, cracking, burning or swelling of a steam or hot water heating system, an air conditioner or an automatic fire protection system
  15. Freezing of a plumbing, HVAC, or fire protection sprinkler system, or an appliance
  16. Sudden and accidental damage caused by artificially generated electric current

Home insurance also covers your personal liability for injuries sustained by other people (those who do not live with you) and their property while they are on your property. The most common liability claims are for dog bites, home accidents, falling trees, intoxicated guests, and injured domestic workers.

Standard home insurance policies do not cover damage or loss caused by floods (whether natural or man-made) and earthquakes. Depending on where you live, it may make sense to add or purchase a separate policy for flood or earthquake coverage. Ask your insurance agent if either is recommended in your area.

How much does home insurance cost?

Your home insurance premium will depend on many factors:

  • Where you live
  • The cost of rebuilding your home
  • The value of your personal effects
  • The size, features and condition of your home
  • The deductible and coverage limits you choose
  • Your home insurance claims history
  • Your marital status and credit score

Another thing that can affect home insurance costs: dogs. If you have a “dangerous” breed of dog, an insurance company could raise your premiums, exclude canine liability coverage from your policy, or deny coverage altogether.

If your insurer doesn’t cover your dog, look for dog-specific liability insurance or an umbrella policy.

Here are the most common dog breeds that insurance companies deem to be at risk:

  • Akita
  • Alaskan Malamutes
  • Chows
  • Dobermann Pinscher
  • german shepherds
  • Great Danes
  • pit bulls
  • Presa canarios
  • Rottweiler
  • Siberian Huskies
  • Staffordshire Terriers
  • wolf hybrids

The essential

Home warranties help cover the costs if an appliance or major home system breaks down. Home insurance, on the other hand, covers your home and belongings against theft and other risks, and also provides liability coverage. If you have a mortgage, your lender may require a home insurance policy. Of course, although it’s not mandatory, it makes financial sense to protect your investment with a good insurance policy.

Whereas home guarantees are optional, they can provide an extra layer of protection and added peace of mind. They may make the most sense if your devices and systems are no longer covered by a standard warranty, if they are at risk of breaking down, or if it would cost you too much to replace them.

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

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