Between mortgage documents, insurance documents, warranties and more, it’s easy for first-time homebuyers to feel like they’re drowning in paperwork before they even move in. Inexperienced sellers also can get overwhelmed. Two particularly confusing documents that may seem redundant at first glance are your home warranty and homeowners insurance policy.
A home warranty is a contract that offers repairs and replacements for covered home appliances and systems that may fail due to normal wear and tear. Here are a few examples of when a home warranty would cover a claim:
A central heating and air conditioning stops working due to normal wear and tear. A home warranty could help replace the entire unit.
The oven stops working due to normal wear and tear. A warranty would typically cover this and other appliances that were in working condition at the time of the contract.
The furnace stops working due to normal wear and tear. Again, a warranty could help cover the cost of replacing it.
It’s not uncommon for home sellers to purchase a one-year home warranty for buyers of older homes in order to help prevent them from getting slammed with unexpected repairs right after they move in. Sellers of new homes may also benefit from purchasing a home warranty, since the added peace of mind typically proves an excellent buying incentive for any prospective buyer.
A homeowners insurance policy, on the other hand, covers the structure of your home, your belongings and other structures in the event of a catastrophe or other covered peril. Here are a few examples of when you could file a claim on your home insurance policy:
- A hailstorm damages your roof and causes it to start leaking. Your policy could cover roof-repairs as well as any of your belongings that were damaged or destroyed by water damage.
- An accidental fire in your home destroys some belongings and leaves smoke damage to the walls, ceiling and floor. Your home insurance policy could help you pay for repairs and replace what you lost.
- A tree falls on your house, breaking windows and exposing your living room to bad weather. Your policy could help you remove the tree from your property and rebuild what was damaged.
Another difference between a home insurance policy and a home warranty is the way you receive coverage. While both require an annual premium, if you file a claim on your home warranty, you’ll simply be required to cover a service charge stated in your contract when a service professional comes to your home. If the claim is covered, your home warranty company will then cover the remaining costs up to your contract’s limits.
Homeowners insurance coverage is different: When you file an insurance claim, you’ll first be required to pay a deductible amount (defined in your policy) before receiving coverage up to your policy’s limits. That means if you’ve set your deductible at $500, whether the cost of water damage in your home is $501 to $10,000, you would always be responsible for covering the first $500 while your insurance provider picks up the rest.
Additionally, your homeowners insurance rates may vary from year to year due to your risk and claims history while home warranty premiums typically remain the same unless service costs increase.
Homebuyers or sellers who are confused about which document covers which types of claims should be sure to ask questions before they commit to either. A licensed expert can help you understand the fine print and customize the coverage that’s right for you.
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