What’s the Difference Between a Home Warranty and Home Insurance?

There is nothing more exciting than buying your first home after years of renting. You now have a place to call your own. And when everything in a home works well, you can relax and enjoy time with your family. 

But have you planned what to do if the worst happens? Like, something unexpectedly breaks down? Or, if a pipe bursts and floods your home? What will you do if you’ve got to fork out cash for expensive repairs? Suddenly, your haven of peace is now stressing you out.

Home insurance and home warranties are ways to protect yourself from financial nightmares. These policies can help meet the cost of repairing or replacing broken, damaged, or destroyed items. In a worst-case scenario, home insurance can even pay to rebuild your house.

But, just a minute, isn’t a home warranty considered the same as home insurance? If I’ve just bought a house, do I really need to think about insuring my home and getting a warranty? Can I have one without the other. This article aims to help you decide if you need home insurance, a home warranty, or both.

Why Consider Home Insurance and a Home Warranty?

Think about it; buying your first home is probably the largest financial investment you’ve ever made. You now have assets that are worth tens, if not hundreds of thousands of dollars. So, it makes sense to protect your investment. 

Of course, no one likes to think that something terrible is going to happen. But let’s face it, things break, and life happens. A storm could destroy part of your property, a burglar could vandalize your home, or an electrical fault could cause a fire — also, appliances age and eventually breakdown. 

But knowing which type of cover you need can be tricky. Let’s explain the difference between home insurance and a home warranty.  

Home Insurance vs. Home Warranty

Both policies provide coverage for unpredictable circumstances. But both work in different ways.

  • Homeowner’s insurance covers the cost of loss or damage to your home and contents caused by someone or something else. 
  • A home warranty pays the cost of replacing or repairing appliances in your home that don’t work due to everyday wear and tear.  

For example, if a pipe bursts and floods your kitchen, home insurance pays the cost to replace damaged appliances, make structural repairs, and restore your kitchen to how it looked before. 

However, if your water heater or HVAC system breaks down because of normal wear and tear, it’s your home warranty that covers the cost, not home insurance. So, a home warranty could be considered insurance against damage caused by regular wear and tear.

Should you buy home insurance?

If you bought your new home with a mortgage, the chances are that you must have home insurance. It’s something most lenders require.

But you need to know how home insurance policies work to make sure you’re covered in all circumstances. Also, you may need to take out additional coverage for jewelry or other expensive items.

Basically, home insurance covers four areas. These are: 

  • damage to the inside or outside of your home
  • loss or damage to personal property due to theft or vandalism
  • personal liability in case someone injures themselves on your property
  • additional living expenses if you can’t live in your home

All types of home insurance include a monthly or yearly premium and paying a deductible. The deductible is your out-of-pocket costs before the insurance company pays you any money.

You probably don’t have a choice of buying home insurance or not. But you have to choose the level of coverage you need. The amount of cover affects your premium and how much the insurance company pays out.

Here’s an example of not having enough cover: You make a claim because a burglar stole your laptop and HD TV. And, your insurance sends you a check. But because you’ve got only cash value coverage, the amount you get isn’t enough to buy exactly the same kind of stuff. Now you’re mad. 

To avoid this scenario, you need to know what gets replaced. Here’s an explanation of the three levels of coverage:

  • Actual Cash Value

You get the value of your home or personal items minus a deduction for depreciation. The cheapest type of home insurance.

  • Replacement Cost 

This type of insurance pays the cost to rebuild or repair your home minus a deduction for depreciation. It also replaces damaged or stolen items with a similar model.

  • Guaranteed/Extended Replacement Cost

This policy is the most expensive type of home insurance. It covers complete replacement, even if the final cost exceeds the policy limit. So, if it costs more to rebuild your home that you’re insured for, you don’t have to worry. You get a new home.

When you take out a home insurance policy, it’s essential to weigh up all factors when deciding which is best. Increasing your deductible is a way to reduce the cost of monthly premiums. But in any case, read the fine print carefully.

Do you need a home warranty?

So, now you can take a deep breath. You think you’ve got your questions about home insurance sorted out. But wait! You now start getting bombarded by companies offering you deals on warranties. What’s the deal with that? 

What does a home warranty really include? Basically: it pays to repair damage caused by wear and tear or old age. Depending on the home warranty, this could include most of the following: 

  • HVAC systems
  • plumbing and electrical installations
  • major appliances such as refrigerators, washers, dryers, oven ranges, furnaces, and water heaters

So, what should you do? Is a home warranty worth it? To answer that question, you got to know the pros and cons of purchasing one. 

First of all, some homeowners sell their home with a warranty included in the deal. So, you don’t have to worry about repairs during your first year. If a warranty isn’t included, you’ve got some decisions to make. 

Benefits of a home warranty

If you’re buying your first home, you probably have no idea about your monthly budget, maintenance costs, and repair costs. So, a home warranty makes it easier to budget for unexpected repair costs. After all, you have no idea what condition the major appliances in your new home are in. The last thing you want to do is get hit with a massive repair bill as you are struggling to make monthly mortgage payments. 

So, in this respect, a home warranty can give you peace of mind. If your heating suddenly dies in the middle of winter, getting it fixed is only a phone call away — no searching for contractors or stressing about how to pay the bill. 

Disadvantages of a home warranty

The major drawback of a home warranty is the fact you may never use it. But this is the case with most insurance policies. When you need to use it, you’re glad you have it. If you never need it, it might feel like you’re pouring money down the drain. 

Also, some providers wriggle out of paying up because they blame poor maintenance issues for the breakdown. 

Many first-time homeowners take out a home warranty for the first year or two after moving in. They use the time to save money for an emergency repair fund and then cancel the warranty. 

Home Warranty and Home Insurance: A Takeaway Message

What’s the bottom line? You probably have no choice of buying home insurance. So, make sure you get the level of coverage you need. 

When it comes to a home warranty, weigh up the pros and cons. You may never need to use it, or it could save you thousands on unexpected repair bills.