Difference Between Home Insurance and Home Warranty

Your house might be your biggest purchase in your lifetime, so it’s important that you protect it. And how do you do that? – By investing in home insurance or home warranties, or both.  But, what’s the practical difference between home insurance and home warranty?
These two are often mistaken to be one and the same thing, but they are different from each other and provide different benefits to the homeowner. They also differ greatly in cost, terms and conditions, and coverage. In some of cases, home insurance may be mandatory but home warranty is an option, albeit a recommended one by some.

Home Insurance

This policy covers accidental damage to the house and your belongings that are caused by storms, theft, fires, and certain natural calamities or disasters. The four areas usually covered by the home insurance policy are the house’s interior and exterior, general liability protection e.g., coverage when someone is inured inside your property, and personal property in events of theft or robbery.

Home insurance is almost always mandatory if you have a home mortgage and is thus regulated by some state authorities. A bank generally requires someone buying a house to obtain this policy before it issues a home mortgage. This policy is renewed every year with an annual cost of $300 to $1,000.

To explain how a home insurance policy works, an example would a water pipe breaking and flooding the kitchen. The insurance adjuster will assess the scenario and will fill out the claim for replacement and repair of the damaged items in the house. When the insurance company approves the claim, they will deduct the cost of the deductible and issue the balance payment for your home repairs. This deductible helps lower your annual policy premium. A higher deductible means lower cost for the annual home insurance policy.

Home Warranty

On the other hand, this is a contract for the service, replacement, and repair of your appliances and certain system components that break down or fail because of age or regular wear and tear. Common components usually covered by this policy are electrical, HVAC, plumbing, washer/dryer, and kitchen appliances. Some insurance companies may also cover bigger systems like pools or spas.

Typically, home warranty contracts have-12 month terms and are not a requirement when obtaining a mortgage from a bank. Although highly recommended, getting a policy is an option left to the home buyer. System plans can be purchased for $75 to $100 a month. Additional coverage can also be purchased for other items.

For example, the HVAC system in your house stops working. An affiliated technician will come to assess the issue. If he decides that the system no longer works due to wear and tear, and it is covered by the service contract, he will make the necessary repairs or replace the system or appliance. This will supposedly only cost you the price of the service call which is typically below $125. The insurance company covers the rest of the cost if approved.

Difference Between Home Insurance and Home Warranty – Which One Should You Get?

As mentioned, in many cases having home insurance is mandatory.  So, it is likely you should already have a home insurance policy now! The cost is minimal compared to the benefits that the coverage provides, especially in events of natural calamities. But how about home warranties? Is it really a good decision to get one?

If your appliances are relatively new and are still covered by manufacturer’s warranties, you may opt to have them excluded from the items covered by your insurance policy.  Also, if you have a nice emergency fund built up, home warranty policies are almost always NOT a good use of your money.  

Having the newer appliances excluded from a home warranty polity could help to keep the home warranty policy costs lower. But if the appliances and systems that came with your house are aging, a warranty contract might be a wise investment. Appliance repairs can shoot up to thousands of dollars while a monthly cost of home warranty will only set you back $100 per month.

My Experience with Home Warranty Plans

I have had two experiences with home warranty plan claims.  In both cases, the home warranty plan was basically worthless for me!

1. Hot Water Heater failure – We bought a house that was ~10 years old and it came with a “free” home warranty plan.  The water heater began leaking, and it was clear that it would need to be replaced.  The home warranty plan covered the new water heater, but I had to use an “approved” installer.  At the end of the day, the bill was around $350 to me out of pocket.  I could have installed a nice hot water heater myself for less than that!  The real annoyance was that the Home Warranty company would NOT pay for the $75 disposal fee of the old hot water heater.  WTF???
2. Refrigerator In-door Water Dispenser Issue – When we purchased our second home, it again came with a “free” home warranty plan.  After several months, we noticed that the in-door water dispenser would not work properly.  I googled around a bit, and it seems that this model has an issue with the water line freezing up as it runs through the freezer door.  I called the home warranty company, explained the problem IN DETAIL, and they agreed to send someone out.  Google said the problem could be fixed by installing a small heat tape type of device for ~$100.  Once the repair guy got there, I was given the news that they WOULD NOT cover any repair on this as it was a failure in the insulation of the door.  They considered this a manufacturing defect.  The final rub was that they wanted to charge me $75 for the service call when nothing got fixed!  I told them where they could stick their $75 bill!!!

Bottom line – for me based on my past experience, a home warranty plan is not a wise investment.  I will never invest in a home warranty plan personally.  But, your mileage may vary.  For those without an emergency fund or limited repair skills (I just use YouTube and look for DIY videos :-)) a home warranty plan should be considered.  Does anyone have pleasant experiences with home warranty plans?