Home warranty vs. home insurance: What you need to know

There are a ton of necessary but confusing options for homeowners to protect or insure their home and belongings. Here, we’ll break down the two most common options to help you figure out which works best for you, and whether you need one or both.

What is a home warranty?

A home warranty is a service contract that provides coverage to repair or replace your home systems and major appliances after breaking down from normal wear and tear.

Think of a home warranty plan as an extended warranty for your home’s internal systems, like the plumbing or electrical system, and appliances, like a washing machine or refrigerator. It will pick up where your manufacturer’s warranty leaves off, as most home warranties won’t cover anything eligible for coverage under a manufacturer’s warranty.

Having a home warranty means you can place a service call if a covered item breaks down or stops functioning. A qualified technician will come to your home to assess and fix the problem or replace the item, according to your home warranty contract. There is usually a service call fee for each claim you make, which can vary by home warranty company and plan.

What is homeowners insurance?

Homeowners insurance is a policy that covers your home’s structure and your personal belongings against specific events, or perils, like theft, a fire, or natural disaster. A homeowners insurance policy also includes liability coverage, which provides financial assistance for legal fees or medical bills you may be responsible for if someone injures themselves on your property.

A home insurance policy typically doesn’t cover normal wear and tear of the home’s major systems or appliances the way a home warranty does. Insurance companies view the breakdown or replacement of major home systems and appliance failures as a maintenance issue and the cost of owning a home. However, home insurance usually covers damage to systems and appliances if a covered peril causes it.

Home warranty vs. home insurance coverage comparison

The main difference between a home warranty and home insurance is what each policy covers. Homeowners insurance covers damage to your home and its contents, but doesn’t cover breakdown of equipment and appliances that a home warranty covers.

Another key difference is that a home warranty isn’t required, while mortgage lenders require home buyers to carry home insurance to get a mortgage loan. Realtors and sellers may offer home warranties when you purchase a new home, but you don’t have to buy it. Some sellers will pay for the first year as an incentive to sell the house. This usually isn’t an option when you purchase homeowners insurance.

The table below compares what a home warranty may cover and which perils an HO-3 homeowners insurance policy (the most common policy type) protects against. Both policies have limitations, exclusions and add-ons available, which can vary by plan and insurance company.

For example, if you choose a basic plan, your home warranty may only cover one or two systems and appliances. But if you upgrade your plan, it might cover everything listed below. Likewise, you may include optional endorsements, like service line coverage, in your home insurance policy to meet your specific needs.

Home warranty vs. home insurance cost comparison

When we compared home warranty companies like Choice Home Warranty, American Home Shield, and Liberty Home Guard, the average monthly home warranty cost was between $40 and $70, or $480 and $840 per year. The service fees also vary by company and are between $60 and $125 per claim.

The national average home insurance premium is $1,311 per year, or around $110 per month, according to National Association of Insurance Commissioner data. If you file a claim, you’ll have to pay a deductible, which is similar to a service fee. Deductibles can range from $500 to $2,000 or more and may even be a percentage of your home’s dwelling amount. For example, if your home’s structure is covered for $200,000 and you have a 2% deductible, your deductible is $4,000.

As listed below, several variables go into pricing a home warranty and home insurance policy.

Home warranty vs. home Insurance: which one should you get?

According to American Home Shield, homeowners are 28 times more likely to use a home warranty plan than their home insurance policy. However, home warranties have a covered item limit per plan year, usually between $300 and $5,000. Home insurance normally has a much higher coverage limit that includes replacement costs on the structure, to ensure the home can be rebuilt if it’s a total loss.

According to the Insurance Information Institute, one in 20 insured homes file a claim each year, with the average property damage claim being almost $15,000, and liability claims averaging over $25,000. Although you’re more likely to use a home warranty, the cost of a covered homeowners loss would cause a much more significant financial burden.

Although you may find you only need one policy type, buying both a home warranty and homeowners insurance can be worth it. The home warranty can provide peace of mind that if an appliance or system breaks due to normal wear and tear, you’ll have coverage that a home insurance policy wouldn’t offer, which could prevent paying for costly repairs out-of-pocket.

Since plans and coverage can vary, it’s a good idea to read the fine print carefully before choosing a home warranty plan or homeowners insurance policy. The contract will explain what’s covered and excluded so you can decide which plan or policy best fits your needs.