Home insurance vs. home warranty: What protects what in your new home?

When you buy a home, you want to make sure that your investment is protected. You purchased homeowners insurance, so you might think that a home warranty isn’t important. However, both homeowners insurance and home warranties are valuable because they offer different types of protection. To make sure your home is fully protected, it’s a good idea to learn what each type of coverage offers.

What is a home warranty?

A home warranty is a service contract that covers many of the appliances and systems inside your home. These warranty contracts typically last for a one-year period with the option to renew each year. Home warranty costs can vary, but they generally start at a few hundred dollars annually.

Most home warranty companies offer various levels of service contracts, and prices are proportionate to the levels of coverage. A basic plan, for example, may have limited coverage and higher out-of-pocket costs if an item needs repaired or replaced. On the other hand, a more expensive policy often has lower out-of-pocket costs and covers more items in the home.

Unlike homeowners insurance, which has a deductible that must be paid before the insurance company begins paying for the loss, home warranty service contracts typically cover the full cost of the item you're having repaired or replaced. All you may need to pay is a fee for the service call.

The home warranty company works with repair businesses like plumbers, electricians and HVAC companies. When an appliance needs attention, you can arrange for a service call through the home warranty company. You’ll pay the service provider a fee for their visit but aren't responsible for the cost of the appliance being repaired or replaced.

There are certain aspects of a home warranty that you should be aware of before you sign a contract for one. If you’re waiting for that old refrigerator to give out so you can replace it with a state-of-the-art model, be advised that your warranty may stipulate for the replacement to be equivalent to the original. If the home you bought has a base model refrigerator, the home warranty company may replace it with a current basic model from the same manufacturer.

You may also find that the warranty company wants to repair an item rather than replace it, or you may have to use a repair company that you do not feel does adequate work.

Before signing a service contract, make sure you read it carefully and review the terms of the warranty. Ask what service providers in your area the home warranty company uses. Make sure they are reputable, licensed and bonded. Read the fine print and look for any exclusions of coverage, extra fees or a maximum payout for a repair or replacement.

What home insurance covers

Unlike a home warranty, home insurance covers damages to the house itself. It may also protect some of your personal possessions and provide liability insurance in case someone is injured on your property. It covers both the outside and inside of your home.

Mortgage lenders usually require you to have a homeowners insurance policy. It ensures that your home is protected in the event of such things as fire, hail, lightning, tornado, theft and vandalism. You can also buy additional coverage for natural disasters like floods and earthquakes.

What to remember: differences between home insurance and home warranties

While both policies are designed to protect your home, each one offers different types of protection. That's why having both is often a good idea. While a home insurance policy covers damage that occurs to your home, it doesn’t cover things like equipment and appliances breaking down. A home warranty means that you can repair or replace items with a lower out-of-pocket cost.

This can be particularly helpful when it comes to major-ticket items like a water heater, refrigerator or HVAC system failing. If you’re buying a home that has older appliances, a home warranty can save you from some expenses if these appliances break down. Compare the cost of an annual service contract to the replacement cost of appliances and mechanical systems. Factor in the age of the existing items, and you can decide for yourself if the home warranty is in your best interest.

For many people, a home warranty makes sense. It ensures that you can get items in your home repaired or replaced and provides a supplement to your homeowners insurance. As you're deciding to purchase a warranty, it's a helpful idea to do a homeowners insurance checkup. Learn about the different types of insurance and levels of coverage to make sure your needs are met and you have peace of mind.