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The difference between insurance and warranty

Posted 22 November, 2019 by Surely
in Finance

Your home is the biggest purchase you’ll ever make in your life. For most, it’s true – the vast majority of us will never have a larger asset on our balance sheets.

However, with tremendous value comes tremendous risk. Black swan events like fire, theft, and climate disasters can result in THOUSANDS of dollars in losses. This scenario is nothing new – countless generations before us have grappled with the same concerns. That’s why insurance exists.

It grants homeowners and bankers the confidence to go on with their lives. In the unlikely event that things do go wrong, their insurance policy will cover any losses incurred.

These days, however, there are more products on the market than just homeowner’s insurance. You can also purchase additional policies like home warranties. What is the difference between all these products? We’ll break down each for you in this post.

 

What is homeowner’s insurance?

 

As we alluded to in the intro, a home is the riskiest purchase you’ll ever make. But you’re not the party that has the most to lose. In most home loans, the bank finances 80% or more of the purchase. For this reason, before a broker will sign off on a home loan, they will require that you get homeowner’s insurance.

What is homeowner’s insurance? It’s a policy that provides security against unforeseen events. At any time, fire, thieves, or hailstorms could wreak havoc on your house. Any of these occurrences could cause thousands or TENS OF THOUSANDS of dollars in damage.

The average homeowner can’t take a hit of that size. Heck, 40% of us can’t even afford a $400 emergency these days. Were it not for homeowner’s insurance, people could just walk away, leaving the bank on the hook.

Instead, in return for paying a monthly premium, banks/homeowners get protection against a slew of worst-case scenarios.

 

What is a home warranty?

 

However, homeowner’s insurance policies are far from perfect. Remember: this product only protects the bearer against UNFORESEEN occurrences. That means if you fall afoul of any anticipated event (in the insurance company’s view), you’re financially responsible.

 

When it comes to insurance versus warranty (homes), many think the former protects against events covered by the latter. This mistake can be an expensive one. In many southern latitudes, air conditioning is a seasonal necessity. In the northern states, so is a furnace.

 

When either fails, your home quickly becomes unlivable. These systems, by their very nature, can be expensive to repair. If a replacement is necessary, bills can soar. A central AC can set you back $7,000, while a new furnace can cost $6,000.

Unless you can prove an unpredictable circumstance (e.g., someone vandalized your AC equipment) caused it, insurance companies won’t open a claim. The reason? Breakdowns due to general wear and tear are inevitable for mechanical systems. As such, they’re deemed to be a predictable occurrence.

As logical as that sounds, it still seems unfair. Unless you’re able to save up a maintenance fund, you’ll always be one broken air conitioner away from broke. It’s a problem that deserves fixing – that’s why home warranty companies are increasing in popularity.

What are home warranties? In essence, they’re like homeowner’s insurance, but for home systems and appliances. In return for a monthly premium, you get comprehensive protection from appliance or system failure.

If anything goes wrong, call your home warranty provider to open a claim. Once they accept, they’ll dispatch the appropriate repair person to your home. You’ll only pay a nominal service fee – essentially the same as a deductible.

In short, home warranties provide the same peace of mind that home insurers do, but for appliances and systems. With the cost of maintenance rising amid stagnant wages, it’s a business model whose time has come.

 

What is a homebuilder’s warranty?

 

Are you still trying to wrap your head around the difference between homeowner’s insurance and home warranties? Sorry, but we’re far from done – it gets more confusing than that.

Have you recently purchased a home in a new community? If you have, you likely have something called a homebuilder’s warranty. Despite the apparent similarity between this policy and home warranties, they differ in fundamental ways.

For one, they cover issues that arise due to labor or material defects. These include everything from flooring to your foundation. Home warranties cover breakdowns that occur from general wear & tear.

Secondly, they only cover issues up to ten years from the completion of your home. Coverage for floors, baseboards, and fixtures may expire after the first year. Foundations usually have the most extended insured time frame at ten years. Home warranties cover your home’s appliances and systems in perpetuity. So long as you are using them correctly, you’ll be covered whenever something breaks.

 

What is an extended warranty?

 

Ever buy an appliance, only to be offered an extended warranty by the cashier? Before opening your wallet, ask yourself: What exactly is an extended warranty? Quite simply, it is a service contract that protects you when the manufacturer’s warranty lapses.

Should your appliance break through no fault of your own, this policy will cover repair/replacement costs. Having said that, these policies have attracted controversy for their disproportionate cost. As such, ensure its expense (some are 30% of an item’s price) is worth the coverage provided. To determine this, read the terms carefully.

 

Which of these products are right for you?

 

The world of insurance and warranties can be a confusing place. Now that we’ve untangled things somewhat, which policies should you get, and which can you safely ignore?

First and foremost: homeowner’s insurance is a necessity. No broker in the world will loan you hundreds of thousands of dollars without it. Without its protection, you’re only one devastating event away from insolvency. And insolvent homeowners don’t pay mortgages.

What about home warranties? It depends. If the home you own is brand new, we don’t advise getting one. Why? Because all the appliances and systems in your house are brand new. If you run/maintain them properly, they won’t break down for at least a decade. If they do, your home builder’s or manufacturer’s warranty will likely cover them.

However, if you just purchased a pre-owned home, definitely look into it. If it’s more than a decade old, the appliances/systems it came with are likely overdue for a breakdown. If your house is ancient, you might spend less on home warranty premiums than paying for repairs yourself.

Homebuilder’s warranties usually come with the purchase of a new home. If you have a choice, though, we strongly recommend getting one. Not all tradespeople have pride in their work. Consequently, you’ll want protection if your home starts to fall apart years ahead of schedule.

Should you get an extended warranty? In most cases, no. The majority of appliances usually function throughout their projected lifespan. And the ones that don’t? They typically fail within the bounds of your manufacturer’s warranty. Lastly, home warranties usually cover most kitchen appliances. If you have one, an extended warranty becomes unnecessary.

 

Protect yourself against the unexpected

 

Insurance and warranty products exist to protect you against costly, unforeseen events. By investing in them, you can save yourself from wallet-busting repair bills.

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