Homeowners insurance covers your home in the event of specific and unexpected losses such as fire, theft or water damage. Home warranty plans are a type of insurance protecting appliances, electrical and plumbing components in a home from wear and tear. Most mortgage companies require homeowners insurance while most realtors offer home warranties.
While the homeowner’s policy is required in some instances, a homeowner should consider having both regardless of lender requirements. One of the biggest shocks first-time homeowners experience is the cost of maintenance and big-ticket losses. Both types of policies protect homeowners from unexpected expenses in different ways.
The Need for Homeowners’ Insurance
A home is a major financial purchase costing hundreds of thousands of dollars for most first-time homebuyers. A homeowners insurance policy is designed to protect the building and the cost to repair or rebuild it. It also covers personal property in the home that might get damaged or lost as well as any liability.
Every homeowner should have homeowners insurance even if it isn’t required by any party with a financial interest in the home like a mortgage company. Yes, I’m an insurance agent and need to say that. But if you spent $400,000 for a home or even if you inherited it and it was lost in a fire, could you pay to rebuild that home? What about the $100,000 worth of stuff in it? Unless you are completely comfortable absorbing the cost to start over, you need homeowners insurance.
What Homeowners’ Insurance Protects
Homeowners insurance is protecting the financial obligations to repair or replace the structure, the items within the building, and any loss resulting from the home or the homeowners. A pipe may burst leading to damage to kitchen cabinets and flooring. A fruit tree in the backyard could fall on the neighbor’s fence. These things are covered by homeowners insurance policies.
Here are the major ways homeowners insurance protects you:
- Building Structure: If something happens to the house in a fire, water loss or something like a tree falling through the center, your homeowners’ insurance policy will pay to repair or rebuild the structure. This may include listed structures like a gazebo as well.
- General Liability: If you or something on your property causes damage or injury to another, general liability pays those expenses. This could be a trick-or-treater falling after stumbling on your porch stairs or your Pomeranian licking the little old lady to death.
- Personal Property: The furniture, cookware, clothing, electronics, and anything else you can keep in the house, garage or on the property are insured by personal property coverage.
Who Pays for Homeowners Insurance?
Homeowners pay for homeowners insurance policies. Usually, the mortgage company is a named insured for as long as they have a financial interest in the property. The mortgage company could demand homeowners insurance be paid in advance and premiums collected in an escrow account that pays the premiums on behalf of the owner annually.
If a homeowner doesn’t have a policy in force, the bank may impose one on him. This is often a high-cost insurance policy purchase on behalf of the bank at its discretion but paid for by the homeowner via added costs to the monthly mortgage. If a check is paid because of a loss, the homeowner and the mortgage lender often are both listed as payees on the check to ensure everyone’s financial interests are covered.
What is A Home Warranty and What Does it Cover?
A home warranty is a specialty insurance policy that covers essential operating items in the home. This often includes appliances, electrical systems, plumbing systems, heating, and central air units. It could also cover roof leaks, solar panels, and garage doors. If something stops working, you pay a deductible, and a technician repairs it billing the warranty company the rest.
Understand that the home warranty doesn’t cover against the same types of losses that a home insurance policy does. If the water heater burst causing water damage to the home, the water heater may be covered by the home warranty for repairs or replacement. All other damage is a claim on the homeowners’ policy.
Who Pays For a Home Warranty?
Home warranties are one-year renewable policies. These are often purchased when buying a home and can be paid for by the new homeowner, the seller, or either real estate agent as part of negotiations or as a gift. Even a non-involved party can buy the home warranty. For example, a parent can buy the home warranty for a child buying their first home.
Regardless of who purchased the policy, the property itself is covered. If the homeowner sells within a year, the warranty can transfer in most cases or a pro-rated refund issued. Homeowners often renew the policy after the first year as part of maintenance expenses.
Homeowners Insurance Vs Home Warranty Examples
Understanding the difference between the insurance policy and the warranty can get confusing. Consider these two examples, both dealing with a heating unit in the home to fully understand what policy covers what type of problem.
Example of Home Insurance Claim
A homeowner turns on the heater for the first time in the winter. The unit wasn’t properly cleaned and there is considerable dust built up within the unit. A malfunction with the dust leads to a spark starting a fire. The fire department stops the fire, but there is $45,000 worth of damage to the home and property. Less a deductible, the rest is covered by the homeowners’ insurance policy.
Example of Home Warranty Claim
A homeowner is preparing for winter and calls an HVAC technician to come and clean the ducts and service his furnace. The technician turns the unit on but it doesn’t kick in. After several diagnostics, the technician determines that the 18-year old unit needs to be replaced. While the technician is licensed and willing to install the new unit, it will cost thousands to the homeowner who thought he was only going to service the unit. With a home warranty, the new furnace is replaced less the trade service fee.
Do You Need Both Homeowners Insurance and a Home Warranty?
Insurance covers unexpected losses. A person can own a home for 50 years and never have a claim on his homeowners’ policy. The same is true of a home warranty. However, most homeowners know there is always a chance that something will break or an accident will happen. It’s about the potential cost.
Paying $500 each year for a homeowners policy usually is well worth the cost of potentially losing hundreds of thousands of dollars in your home. But paying that same $500 each year when you have new appliances, plumbing or electrical systems might not feel worth it for some homeowners who would rather save the money and have it when something needs to be repaired or replaced.
How Long Does a Home Warranty Last?
A home warranty is an annual policy. Some homeowners get it the first year they buy the home and never renew them while others maintain the policy in anticipation of things going wrong. Some homeowners don’t get a warranty immediately but buy one later, though a waiting period often applies. Prices may vary if you purchase outside of the escrow process.
How Soon Can I Use Home Warranty?
Read the policy waiting periods as they may vary among warranty companies. In most situations, most homeowners can use the policy immediately after closing escrow. If you purchase the home warranty after escrow closes you may have a 30-day, 60-day, or longer waiting period before you can use it.
Understanding a Deductible
A deductible is the policy owner’s portion of costs before coverage kicks in for insurance. In a homeowners insurance claim, the deductible is the portion the homeowner is assuming as his part of the loss, often $500, $1,000, or $2,000. If the claim is $25,000, the homeowner is responsible for the deductible, say $1,000 then the insurance pays the remaining $24,000.
In a home warranty, the deductible applies to someone coming out to evaluated the problem. The deductible might be $79 for a claim. For example, if the stove stops working, it would be $79 for the technician to evaluate the problem and then get approval for the work or replacement. If the stove can be repaired, it will be. If not, it will be replaced for a similar model.
Final Thoughts: Homeowners Insurance Vs Home Warranty Plan
A homeowners insurance policy is purchased to protect the major investment of your home from sudden losses. Buying a home warranty plan is to protect the problems with items that break due to wear and tear. The differentiating thought between what is protected in homeowners insurance vs home warrant plans is whether the claim just happens (like a burst pipe) or is it the result of years of use.