As far as purchases go, your home is up there — it’s one of the biggest purchases you’ll ever make, generally speaking. Whether you’re spending hundreds of thousands of dollars or tens of thousands of dollars, it’s still a lot of money — so you’ll want to be sure that the home you purchase is protected. You’ve probably heard about homeowner’s insurance and home warranties, but the differences can be subtle and confusing. Don’t worry, we’ll iron out the wrinkles for you so that you’re confident you’ve make the right decision in coverage on closing day.
Home Protection Basics
Both homeowner’s insurance and a home warranty will cover your home against a variety of problems, but the issues each covers are very different in magnitude. In general, homeowner’s insurance (aka home insurance or hazard insurance) covers you in case of major problems, like fires, tornadoes or theft. Homeowner’s insurance has fairly standard components, but policies may have subtle differences in coverage.
Home warranties are like insurance policies in some ways, but they’ve got much smaller price tags than your homeowner’s and cover less of the big stuff. Your home warranty would take care of an appliance that stopped functioning or a bad air conditioner during the warranty period. Many are renewable and will continue to provide protection from year to year if you so choose.
Contractor’s or builder’s warranties are another thing entirely, and will only get a brief mentioning to help clear up any confusion. Unlike homeowner’s insurance and home warranties, a builder’s warranty is provided by the home builder to the first purchaser of a home, and covers any defects in the structure or materials that make up the house. Usually, the warranty follows the warranty of the materials and those provided by subcontractors, so the terms for each item in your home can vary widely. You’ll want to get your homebuilder’s warranty in writing to ensure everyone is on the same page.
What Does Homeowner’s Insurance Cover?
Homeowner’s insurance is an umbrella-style policy that covers your home in case of damage, but also protects you against lawsuits because of things that happen on your property. For example, if you neighbor slips and falls in your yard and is injured, their medical bills would be covered by your homeowner’s policy. These are the standard coverages of a homeowner’s insurance policy:
Dwelling. The structure that you’re inhabiting, your home itself, from roof to foundation, is the most important coverage on your policy. The coverage can be written in a couple of ways, based on your home’s configuration and value. Some insurance companies write their policies using just the current value of your home, while others will write them based on its estimated replacement cost.
Many offer both options, but if your insurance still seems too expensive, you can often chose to further reduce your coverage amounts to the amount of your mortgage. However, if you do choose to take out a smaller than recommended policy, you may be liable for a portion of the cost of rebuilding your home in case of the unforeseeable. Because your home’s value and cost of replacement can change quickly, it’s important to meet with your insurance agent each year to ensure you have the coverage you expected.
Other Structures. This covers exactly what you’d think it would — all those little buildings and permanent structures on your property. The coverage extended is typically a percentage of your home’s coverage, but can be increased for an additional price in the event you have a very valuable building like a mechanic’s garage or fully-loaded woodshop on your property.
Let me caution you, though, some policies are funny about covering buildings and fences that were placed without proper permitting or municipal inspections. If your city requires you get a permit before you build a shiny new greenhouse in your backyard, make sure you do it or your insurance may not cover it when a windstorm tears through. Don’t worry too much about existing buildings, the insurance inspector should have already noted these and their current conditions.
Personal Property. Most of that stuff you’ve got in your house and outbuildings, like family photos, your dining room table and your laptop, are generally covered under the personal property section. Coverage for titled vehicles like your car or RV generally fall under their own policies. A good insurance company will provide you with replacement cost coverage for your personal property, meaning that they’ll pay you whatever it costs to purchase a similar item new at the time you make a claim.
You may require a special add-on insurance policy called a rider for pricey items like jewelry, furs, antiques, collectables and home office equipment. Ask your agent about your policy limits and if they’re not enough to cover the value of the baseball card collection you started when you were eight, you should add a rider. For a few extra dollars each month, you’ll know that your special items are covered in case of theft, fire or other catastrophic events.
Loss of Use. Loss of use is probably the least understood thing on your insurance policy, but it’s really very simple. If your home is damaged and considered uninhabitable, your insurance company will pay for you to stay at a hotel or in a temporary apartment. There is generally a limit on how long your can stay or how much you can spend while you’re waiting for home to be repaired, so keep a close eye on the calendar. You’ll have to check with your agent to see if there’s any additional coverage built-in for loss of income if you use your home as your workplace.
Liability. Accidental injury and property damage happens, your insurance company understands that — this is why they’ve built some coverage into your policy to protect your home from claims in the case of this type of accident. If you’re sued after an accident that results in bodily harm or serious property damage, your insurance company will step up to the plate, providing you with representation and paying any award within your policy limits.
Check your policy carefully because this section usually has a lot of exceptions and exclusions. In general, if you or a member of your household causes accidental injury or damage, you’ll be covered, but you really want to address it ahead of time if there’s something excluded that you think should be covered.
What Homeowner’s Insurance Doesn’t Cover
It’s almost guaranteed that your policy will not cover flood or earthquake damage, so if you’re in an area prone to these problems, listen up. You’re not on your own if you need this type of coverage — you’ll just have to get a separate policy to protect you.
Flood insurance is provided through the National Flood Insurance Program and usually needs 30 days to take effect. Buy flood insurance now if you think you need it, even if your mortgage company doesn’t require it. They will typically confer with the NFIP’s flood maps to determine whether you’ll have to carry coverage or not, but if your risk is borderline, you may still want to opt in.
Earthquake insurance providers are much more plentiful, with most major insurance companies offering a policy. What your earthquake policy covers will vary from state to state, but you can expect it to cover much of what your homeowner’s covers: namely your home, other structures, your possessions and your loss of use. This type of policy will only cover the earthquake-related damage, your homeowner’s will be expected to step in if further problems like an electrical fire complicate your loss.
What’s a Home Warranty For?
We’ve more than covered homeowner’s insurance, and you know that it’s for the big things in life. Does that mean that a home warranty is a useless scrap of paper? Of course not! Home warranties are great for homeowners who are going into their home fairly cash-poor, which is common for first time buyers. These mini insurance policies keep the basics of your home fully functional, provided you call to report the problem in a timely manner.
Most will cover major appliances, plumbing, water heaters, ceiling and exhaust fans, electrical systems and heating and air systems. Even though you pay a chunk for this warranty at closing, there is generally a fee for calling out a serviceman to diagnose the problem and make their recommendation to repair or replace your appliance. This fee is set in advance by your warranty company. Check your documentation for more information, most fees are under $100, saving you a considerable amount over a regular service call.
What Coverage is Required for a Mortgage?
If you’re buying with a mortgage, a basic homeowner’s insurance policy will almost always be required by your bank. They want to be sure that their investment is covered, just in case your backyard barbeque takes a turn for the interesting. Banks learned long ago that if you didn’t have coverage, you’re far more likely to let those repairs linger due to lack of funding or interest — so now everybody has to have insurance in place.
Although a home warranty is nice, your bank doesn’t really care if your stove goes out during your ownership. Even though they’re not required, they can often be rolled into your loan, which means you’ll have a year of headache-free home ownership. In my experience, most of the time people never file a claim against their home warranty (that’s how they make money), but when someone does have to file a claim, it’s a big one.
The Bottom Line: Homeowner’s Insurance and Home Warranties are Great for Homeowners
You’ll never sleep as soundly as you do when you know your home is properly insured and has a warranty to protect you from unexpected major expenses while you’re trying to get your emergency fund rolling. Buying a home isn’t cheap; the closing table and costs associated with moving can drain your savings quickly. When you’ve got no liquid funds to speak of, a home warranty is your best friend.
Homeowner’s insurance is not an option for most buyers, but even those who can choose for themselves should take out a policy. Nobody expects to end up with a burnt-out husk of a home, but these things happen every day. Run, don’t walk, to your nearest insurance agent and get the coverages your home requires if you hope to live there for long.