Which is better: a home insurance or a home warranty?

Home warranties are becoming more popular when individuals purchase homes.

Real estate agents provide access to their purchase and even recommend them to reassure people who worry that the appliances and systems in their home purchases may fail within a year or so after purchasing the home.

Some people think that a home warranty can replace home insurance, but a thorough understanding of both can clarify that misconception.

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Home Warranties and What They May Cover

Home warranty contracts are sold by private industries and may be paid for by the seller of a home or even the real estate agent attempting to sell the home. Individuals may purchase these contracts, too.

The average home warranty contract costs $300 to $500 a year. When purchasing a home warranty contract, you should be cautious about a number of things:

• Examine complaints and the repute of the firm offering the warranty. Many of these firms are not reputable and it takes research to determine their status. The Better Business Bureau in your area may have ratings on them, as may your state’s Attorney General. Be sure to ask and research.
• Home warranties repair malfunctions and breakdowns of appliances and systems. Exact definitions of the systems covered should be outlined in your contract, examine it for the listing of these.
• A service charge of from $50 to $100 is usually levied for repair calls. The warranty company has its own approved repair people and will call them.

When It is Reasonable to Purchase a Home Warranty

After doing research and satisfying yourself that the company is reputable, these are reasons for purchasing home warranties:

• The appliances in the home are aging.
• The home is more than five years old.
• Doing the repair yourself is not an option.
• You do not know contractors and have no idea whom to call.
• You do not have a savings account for repairs.
• You are a first-time home purchaser.

Home warranty contracts for older homes are designed to provide protection against wear, tear, and age.

The following systems should be protected by your home warranty:

• Inside electrical system
• Appliances
• Heating and air conditioning
• Interior plumbing – not including the fixtures

The home warranty contract usually does not provide structural coverage nor does it apply to sudden loss from many of the perils that are covered under insurance.

Home Insurance Policies

A home insurance policy provides coverage against many things that are not contemplated in a home warranty policy.

Because of this, a home insurance policy on average costs $979 in the mainland United States. Aspects of home insurance that should be examined are:

• Repute and financial stability of the insurance company providing coverage
• Amount of coverage to be purchased
• Perils to be insured against – damage to property
• Perils to be insured against – liability coverage
• Type of coverage – replacement cost or actual cash value
• Deductible
• Ways to save on premiums

Repute and Financial Stability of Insurance Companies

Insurance is controlled by the state in which you live and insurance companies must be licensed by the state.

The state’s insurance website will give you information about licensing, complaint to premium written ratios for insurance companies, and financial ratings for insurance companies. For further information, you may link to the following sites:

• National Association of Insurance Commissioners (NAIC)
• A. M. Best Rating Service
• Standard and Poor’s Ratings

The financial ratings will give you an idea of how sound the company is with regard to management of its insurance portfolios. A complaint ratio is useful to give you an idea of how many complaints have been lodged against the company in the past year compared to the amount of premium written.

A high complaint ratio can indicate that the company has trouble with the everyday business of writing insurance.

Amount of Insurance Coverage to be Purchased

It is common for individuals to base the amount of insurance they purchase upon the amount they paid for their home.

This, however, should be considered carefully because it may not reflect the real value of the home. There are a number of ways of determining the replacement cost of a home. These are:

• Insurance inspection – when an individual comes out to measure area and estimate the quality of construction based upon certain criteria.
• Area of the property – and a calculator. Insurance agents have access to calculators that will help you determine replacement cost based upon area. You can access a free one by linking to Building-Cost.net.
• Get an estimate from a contractor.

Perils to be Insured Against – Property Damage

Recognize that the perils, which an insurance company covers, are definitely not those of war, tear, and age. In fact, if a building is covered for actual cash value, a thirty-five year-old roof may not have any insurance at all considering the average life span of roofs and possible causes of loss.

The Special Form of home insurance policy, which is the most commonly purchased protects against the following hazards:

• Explosion, fire, lightning, and smoke
• Windstorm, hail, vehicular damage, and civil unrest
• Vandalism and theft
• Falling objects, including trees
• Weight of snow, sleet, and ice
• Sudden and accidental overflow of heating, air conditioning, or plumbing systems as a result of freezing or rupturing.
• Sudden and accidental overflow of household appliances

Some people are not aware that Flood Insurance and Earthquake Insurance are not covered under the home insurance policy.

To purchase either of these, you must approach your local agent. Information about flood insurance can be obtained through FloodSmart, a government website. Information about earthquake insurance is acquired through your agent.

Perils to be Insured Against – Liability Coverage

Liability coverage is not offered under a home warranty contract at all; whereas, a home insurance policy can offer up to $500,000 of personal liability coverage that follows the residents of the household in their legal activities both on and off the property.

Medical payments coverage of from $500 to $5,000 may be purchased to pay for damage to others on the premises of your property.

This coverage does not rely upon a lawsuit to be triggered and is of value in the event of slip-and-fall accidents and even dog bites.

Be aware that the home insurance policy does not offer any coverage for motorized vehicles and recreational vehicles such as mopeds or four-wheelers.

You must purchase a separate policy for these.

Type of Coverage – Replacement Cost or Actual Cash Value

It is recommended that you purchase replacement cost coverage on your home insurance policy because you will be more satisfied with this coverage. The differences are:

• Replacement cost coverage pays for replacement of the property with like kind and construction, not deducting wear, tear, and age. This way you will not have to pay the difference between new construction and the actual value.
• Actual cash value coverage takes into consideration wear, tear, and age. Sometimes this leaves the home owner covering the gap.

Deductibles

Deductibles are required by home insurance policies. Careful examination of the deductible you purchase can save you money in premiums and eliminated coverage that you may not use.

Consider if you would submit a claim for less than $500 before you purchase a deductible of $100 for losses. Check with your mortgage company to be sure that they agree and then you can take advantage of possible credits for a higher deductible.

Saving Money on Insurance Premiums

Saving money on insurance premiums is possible, and there are a number of strategies to help you do so.

• Shop carefully and get several quotations for insurance premiums
• Raise your deductible
• Install fire and burglar alarm systems for premium credit – consult with the company on brands
• Upgrade electrical, heating, and air conditioning systems in older homes

Finally, once you have purchased a home insurance policy, be sure to read the policy to be certain that the policy is what you thought you purchased. Become familiar with restrictions and clauses.

Then, do an annual insurance checkup to make certain that everything is current and reflects your situation.

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