Home warranty vs. home insurance

What is the difference between a home warranty and home insurance?

A home warranty is an optional contract between you (the homeowner) and your warranty company for coverage of repair or replacement costs when a home system or appliance malfunctions.

Home warranties are always optional.

Homeowners insurance is a policy that pays for damage and loss caused by outside forces such as fire and severe weather. If any of these “perils” destroy or damage your home or possessions, insurance will compensate you for your loss.

For example, if a big tree falls and crashes into your kitchen, a home insurance policy would pay to replace any damaged appliances.

“However, if your oven range quits working one day due to age, the cost to repair and replace it would not be covered through a home insurance policy,” according to Angel Conlin, chief insurance officer at Kin Insurance, a direct-to-consumer digital insurer based in Chicago.

Home warranty vs. home insurance coverage

Home warranty coverage is completely different from home insurance coverage. Home warranties pay for problems most homeowners face that home insurance doesn't address, like if your air conditioning breaks down or washing machine malfunctions, according to Conlin. This type of policy focuses on repairs for systems and appliances. Homeowners insurance compensates you for loss of or damage to the physical structure of your home or your personal possessions, and it includes liability protection.

What a home warranty covers

A home warranty plan covers specific components of appliances and systems — not necessarily each and every part. Coverage varies by plan and provider, but the following items are typically covered by home warranty companies:

• Air conditioner
• Heating system
• Ductwork
• Electrical system
• Plumbing
• Water heater
• Garbage disposal
• Refrigerator
• Range, oven and cooktop
• Clothes washer and dryer
• Dishwasher
• Built-in microwave
• Ceiling fan
• Garage door opener

In addition to these common appliances and systems, companies will usually offer add-on coverage so you can customize your plan. Some of the top companies offer roof leak protection, along with coverage for guest units, sump pumps and pools, for example.

Just remember that certain exclusions and limitations exist for each item. Your contract should state exactly which components are excluded; carefully read a sample contract to prepare yourself. If you’re not sure, ask for clarity before you buy a plan.

» TIPS: 10 questions to ask a home warranty company

What home insurance covers

A standard policy pays for financial losses caused by fire, severe weather and other unexpected events. In general, homeowners insurance offers three types of protection:

1. Dwelling coverage: This part of the policy pays to rebuild or repair your home. Standard policies usually include your home’s walls, roof and foundation and other structures on your property, like a garage.
2. Personal property coverage: This covers your personal items, such as furniture, clothing and electronics. “Imagine turning your home upside down and shaking it. Anything that falls out is your personal property and is typically covered by your homeowners insurance,” Conlin said.
3. Liability coverage: This protection can cover your legal responsibility if anyone is injured on your property. It will also cover any related medical costs.

Policies can also cover additional living expenses if you ever need to pay for temporary housing while your home is being repaired. Some policies also include flood or earthquake insurance and other coverage options.

Home warranty vs. home insurance costs

The cost of a home warranty versus home insurance varies depending on your level of coverage, where you live, the age and condition of your home and other factors.

In general, home warranties are less expensive than home insurance. However, it's important to carefully consider the level of coverage you need for your home and to shop around for the best policies and rates for your individual situation.

• How much a home warranty costs: Annual costs for a home warranty typically range from $450 to $600, though the most comprehensive plans can be $1,200 or more. You’ll also need to factor in the cost of the service fee, which is between $75 and $150 each time you file a claim.
• How much home insurance costs: Average yearly premiums in 2020 were between $846 and $1,654, depending on various factors, according to the National Association of Insurance Commissioners. Most deductibles (how much you pay out of pocket before coverage kicks in) are $500 to $2,500. The cost you pay each month depends on the location of the home, your claims history, the type of coverage you choose and your marital status, among other factors. Whether you have a dog, swimming pool or trampoline can also affect the rate.

» TIPS: How to save on homeowners insurance

Filing claims

Whether you file a claim with your warranty or insurance company will depend on what went wrong. Call the home warranty company if you need to repair or replace a big appliance or system after a breakdown. Call the insurance company if you’re dealing with damage or loss caused by an unexpected event like fire, theft or natural disaster.

• Home warranty claims: After filing a claim with your provider, you’ll pay a service fee and the company will send out an approved technician to assess the damage. The technician will determine if repairs or a replacement is necessary. Depending on your plan’s coverage limit, you may have to pay out of pocket for anything over the maximum.
• Home insurance claims: First, contact your insurance company and provide details of the damage. An adjuster will assess the damage and determine the extent of the claim. You should keep records of all related expenses and follow up with your insurance company if you have any questions or concerns.

» LEARN: How to file a home warranty claim

Home warranty pros and cons

Home warranty contracts cover breakdowns from regular use and age, which is one reason homeowners find them so attractive, especially if they’re new buyers or purchasing an older home, according to Conlin.

A home warranty reviewer from North Carolina was pleased with how seamless the entire process was, stating: “Home air conditioner was not generating cool air on an extremely hot day. I submitted a service request … and HVAC experts came out, assessed the problem and replaced the capacitor on the air conditioner. Immediately cool air started flowing.”

Some home warranty companies let you choose your own licensed service technician, but most assign a contractor from their network. This is because providers usually have agreements with specific contractors to get discounts on labor.

One point for homeowners to know before purchasing a home warranty, according to Colin, is “there is a requirement that your systems and appliances must be properly maintained, which is a perennial sticking point.”

Also, keep in mind, “While a home warranty may be a good fit for your needs, it doesn’t replace the need for homeowners insurance,” Conlin said.

» MORE: Annual home maintenance checklist

Home insurance pros and cons

Home insurance is an important type of financial protection for homeowners, but it's essential to carefully review policy terms, limitations and costs to ensure the coverage is appropriate and affordable.

If you’re comparing quotes that seem too high, consider raising your deductible or asking about discounts. Bundling home and auto policies is just one of the ways to save money on home insurance.

Companies often give discounts for switching from a different insurer, being claim-free and setting up automatic payments. You can also usually get a discount for installing a monitored security system.

Who should buy a home warranty?

A home warranty is not mandatory with the purchase of a home, and purchasing a policy doesn’t make sense for everyone. You should consider buying a home warranty if:

• You own an older home. An older home that hasn’t been recently updated is likely to have outdated appliances and systems. And once these items reach the halfway point of their projected life spans, the chances of breakdowns will increase.
• You have limited savings. The cost to repair an appliance can be $200 or more. Likewise, replacing a major system, such as your HVAC system, could cost thousands of dollars. If you don’t have enough savings to cover these costs, it’s worth it to spend $40 to $60 a month in case something goes wrong.
• You’re not handy. Not everyone feels comfortable with do-it-yourself repairs. If you’re worried about further damaging an appliance or just prefer the peace of mind you get from working with a professional, a home warranty can be a good choice.

Conversely, if you just purchased a newly built home, it should come with a builders warranty. A builders warranty covers any structural defects with the house, as well as issues with home systems. If you have a home with newer appliances, they should still be under warranty.

Lastly, if you have a sizable emergency fund for repairs, spending money on a home warranty probably won’t be worth the added cost.

Who should buy homeowners insurance?

There is a lot less wiggle room when it comes to buying homeowners insurance. Most mortgage lenders require homeowners insurance until you pay off your house. It’s also necessary if you have a reverse mortgage or home equity loan. Depending on where you live, your lender might require flood or earthquake insurance.

Even if you paid cash upfront for your house, signing up for a home insurance policy is still highly recommended. Insurance will pay for more than just damage to the house — it’ll pay to rebuild your house if it’s destroyed, protecting your investment.

Bottom line: Do I need both?

Home insurance covers damage to your home and personal belongings from events such as fire, theft and natural disasters. It also offers liability coverage for injury or damage to others on your property. If you have a mortgage, getting a policy is likely required. However, it’s best that every homeowner has coverage to protect their investment.

A home warranty is never required, but a good warranty plan will pay for the most common repairs homeowners have to make, such as for plumbing leaks, electrical malfunctions and appliance breakdowns. Depending on the age of your home, appliances and systems, your budget and your risk tolerance, you might opt for a home warranty or decide you don't want the additional coverage.

» MORE: Is a home warranty worth it?