A home warranty is a renewable home service plan that protects your home systems and appliances — like HVAC systems and hot water heaters — when breakdowns occur. While homeowners insurance policies often only cover catastrophes, warranties are designed to help pay for the things that wear out or break from day-to-day use.
How does a home warranty work?
A home service plan is purely elective, but it’s a smart purchase, according to Raj Midha, senior vice president and general manager at American Home Shield, a home warranty company. A typical policy will run a homeowner between $50 to $75 a month. Even with that low price tag, Midha says they can pay off big in the end. “Let’s say your HVAC system stops working. In that case, a qualified, independent service contractor will be assigned to assess the problem,” he says. “If it’s determined that the system is no longer working because of age or wear and tear, and the breakdown is covered under the terms of your service contract, the repair professional will make the repair, or if necessary, replace the appliance or system component for just the cost of your service call.”
With Midha’s company, that savings could vary based on the coverage you’ve selected for your policy. “A one-time service call costs either $75, $100, or $125 based on the amount you choose in advance when you become a member, and American Home Shield pays the remaining amount for the repair or replacement based on the plan that you have selected.”
Here’s what it won’t cover.
Each plan is different, which is why Midha says it’s important to understand the specific coverage limitations of your policy. “In general, a home warranty does not cover events like fire, smoke, theft, fallen trees, or damage caused by weather, which are covered by home insurance,” he explains.
Who benefits most from a home warranty?
People with new construction properties or recently updated homes may think that there’s no reason for them to purchase a home warranty for their home since their appliances are new, but Midha says they’re a great investment for any homeowner. “They are suitable for any type of customer, due to the wide range of options for customization and add-on coverage, but may be an especially wise decision for homeowners on a set budget, owners of older homes, or recent home buyers who opted to waive their inspection contingencies,” he explains. “The protection of a home service plan can save you hundreds or even thousands of out-of-pocket dollars, as well as the headache of finding a trusted service contractor to make the repairs.”
Who doesn’t benefit from a home warranty?
Of course, not everyone will get the most bang for their buck with a home warranty. Because most warranties are contingent upon the homeowner having properly maintained the items, some of your most expensive appliances may not be covered due to a previous owner’s neglect. Additionally, when you opt to use a home warranty to cover your appliances, you may not get a say when it comes to picking the brand used to replace items that are damaged beyond repair. And lets not forget, similar to an insurance policy, you’ll pay your annual premium for your warranty regardless of whether you need any repairs or replacements. Some people may feel like that money could be better spent being tucked into an emergency savings account to be applied to a wider range of emergencies.
How does a home warranty differ from a home insurance policy?
An easy way to differentiate a warranty from insurance is that homeowners insurance protects against things that might happen, explains Midha (like fires, theft or natural disasters). Warranty plans, on the other hand, protect against things that will happen due to normal wear and tear (like broken down ovens and air conditioning units that have cooled their last hot afternoon).
Here’s how to get your own.
While they’re often advertised as a perk when you’re looking to purchase a new home, you can purchase a policy at any time. “Once you purchase a plan, you can start using your home warranty after the 30-day waiting period, which is an industry standard,” Midha says, adding that if you’re looking to purchase a plan yourself, you should look for a well-established provider committed to transparency in coverage terms, service procedures, and pricing.