Home warranty vs. homeowners insurance

In order to purchase a new home, many mortgage lenders may require you to have homeowners insurance. Even if you don’t have a mortgage, homeowners insurance is essential protection for you and your property. The most common type of homeowners insurance policy includes coverage for the structure of your home and any built-in appliances, the contents of your home, like your furniture and belongings, and any expenses you incur if someone is injured on your property.

Homeowners insurance will cover any built-in appliances damaged by a covered peril, like if a power surge fries your dishwasher. But your homeowners insurance doesn’t cover everything. It won’t cover any perils that are excluded from your policy, and a standard homeowners insurance policy typically won’t cover appliances that break or stop working due to mechanical failure.

That’s why some homeowners might consider a home warranty, which is basically breakdown coverage you can acquire through a third-party vendor to cover appliance and system breakdown, including repair or replacement of things like an HVAC system, your washer and dryer, or a central vacuum. However, home warranties typically have limits to what they'll cover and for how much, and they may wind up being much more expensive than they’re worth.

Your home insurance already covers appliances from lots of types of damage, and if you’re concerned about mechanical breakdown, you can add equipment breakdown coverage to your homeowners policy to cover the same things a home warranty would for less money. And don’t forget, many of your appliances may also still be under their manufacturer warranty if they're relatively new.

What is a home warranty?

On a basic level, a home warranty is a service contract that can cover repairs or replacements to built-in appliances, heating and air conditioning systems, and plumbing inside your home. But before you buy a home warranty, you should read the terms and conditions carefully as some home warranties may cost a lot without covering much.

Home warranty companies generally offer several tiers of coverage starting with a basic warranty that provides repairs and replacements to specific parts of the home. Enhanced coverage might extend these repairs to central air, clothing washers and dryers and refrigerators, and optional warranty coverage may cover pools, septic systems and central vacuums.

The appliances that are covered by each tier will vary depending on which third-party vendor you purchase a home warranty from. The plans may also be expensive, with services fees and tips raising your out of pocket costs significantly, and they’ll likely have limitations of the types of damage they'll cover which you may not find out until you request a service.

If you own a newer home or recently purchased any major appliances, your appliances may still be covered by their manufacturer’s warranties so you should double-check before purchasing additional protection.

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What is homeowner’s insurance?

Homeowners insurance provides financial protection to your home, assets, and personal belongings. A homeowners policy isn’t mandatory in any state, but many mortgage lenders will require you to buy one before you can purchase a home, and homeowners who don’t have a mortgage should still have insurance to protect themselves and their property.

Most homeowners policies include six core coverage components, which both insure your property directly, and protect you if you’re liable for damage or injury. These coverages include:

• Dwelling coverage - Insures your home’s structure, built-in appliances, and roof up to the cost of replacing your home. It’s also the foundation of most insurance policies as other coverages are calculated as a percentage of your dwelling coverage limit.

• Other structures coverage - Protects structures that are detached from your property such as garages, sheds, and mailboxes.

• Personal property insurance - Covers you up to your limit if your personal possessions are stolen or damaged by a covered peril.

• Loss of use coverage - Reimburses you for additional living expenses if a covered loss forces you out of your home and into a temporary living space.

• Personal liability coverage - Protects you from expensive medical bills or repair costs in the event you’re held liable for someone else’s bodily injury or property damage.

• Medical payments coverage - Covers guest injuries on your property, regardless of who is at fault.

If you’re a homeowner, you probably have an HO-3 policy, the most common of the eight different types, which provides covers your damage to your home caused by any peril except those specifically excluded from your policy.

That means that your built-in appliances are covered from damage caused by any covered peril, like if a kitchen fire damages your stove or a lightning strike causes your HVAC system to stop working. Standard homeowners insurance does not cover wear and tear or mechanical breakdown, however you may be able to add supplemental coverage to expand coverage for your appliances.

Equipment breakdown coverage

Equipment breakdown coverage is an optional coverage you can add on to your homeowners policy to cover appliance breakdown due to electrical or mechanical failure. Equipment breakdown coverage insures a variety of appliances and devices in your home including ovens and microwaves, washers and dryers, home security systems and more.

Equipment breakdown coverage is very similar to a home warranty, except you can add it directly to your policy instead of getting a third-party vendor involved. It’s a relatively affordable coverage, it may cost you just $25 or $50 per year to add $50,000 worth of equipment coverage to your policy. It typically requires a deductible of $250 or $500 which you must pay before your insurance company can cover the rest. Not every insurance company offers equipment breakdown, however, so check with your insurer if you’d like to add it to your policy.

Home warranty vs. home insurance

Ultimately, both a home warranty and equipment breakdown coverage can help repair or replace damaged appliances in and around your home. Both also require a deductible and monthly premium payments. But there are also some distinct differences between the two, so to give you a fuller picture, we’ve listed some pros and cons for each below:

Home warranty pros

• Can cover damage from perils that are excluded on your homeowners insurance policy

• Can cover appliances damaged by regular wear and tear

• Could be better for older appliances that need frequent repairs

Home warranty cons

• Service fees, co-payments, and tips can raise the overall cost

• Won’t cover extreme structural damage and may have other limitations on coverage

• Can cost as much as an entire homeowners insurance policy

• Your appliances may already be under warranty

• You risk paying out more for coverage than you get back

• Broken items may only get replaced up to their depreciated value, so you’d have to pay the gap out of pocket

Equipment breakdown insurance pros

• Covers all the same equipment as a home warranty

• You can add to your policy through your insurer

• It’s cheaper than a home warranty, generally costing $25-$50 a year

Equipment breakdown insurance cons

• Not every home insurance company offers it

• Requires a deductible

• Does not cover regular wear and tear

A robust home insurance policy, with equipment breakdown coverage added, is better protection than a home warranty because it offers the same coverage at a significantly cheaper price. Homeowners whose insurance companies don't offer equipment breakdown coverage might want to consider setting aside a certain amount each month in a fund to cover unexpected appliance repairs rather than opting for a home warranty in order to avoid paying more for coverage than you get back.