Exploring the Pros and Cons of Extended Home Warranties
According to IbisWorld, home warranties represent a $2.1 billion industry, which employs 8,200+ people across more than 180 companies. Some top-grossing businesses include Frontdoor Inc., First American Financial Corporation, and Fidelity National Financial Inc.
Should you spend your hard-earned money on an extended home warranty, though? That’s the main question I’ll help you answer in this article, starting with the basics.
How Does an Extended Home Warranty Work?
A home warranty is an annual contract between an individual and a corporation that can protect different items from failure or damage, depending on the company and your agreement. Typical items covered include:
- Appliances – Washers, dryers, refrigerators, dishwashers, ovens, swimming pools, spas and equipment
- Electrical – Wiring and related equipment inside or attached to your property’s main structure
- HVAC – Furnace, air conditioner, ductwork
- Plumbing – Pipes located inside your home’s walls, septic systems, wells
- Roof leaks
Most extended home warranty companies offer different coverage tiers, starting with basic and progressively increasing the number of items covered and the perils they’re covered for (not to mention the price).
For these reasons, in some instances, a home warranty might pay for all covered repairs, less your deductible. In other cases, they will cap the payout for certain claims classes, limiting their total exposure. As such, you must read all the fine print on a home warranty before buying.
After filing a home warranty claim, the company will assign a technician from one of their approved service providers to examine the situation, which determines whether the system needs to be repaired or replaced.
For the professional’s visit, you’ll be responsible for paying a small service fee/trade call fee. Keep in mind that if multiple professionals need to visit your home, you could pay a separate fee for each one.
Finally, the company will approve the claim and complete the repair work, less your contract’s deductible.
What’s the Difference Between a Home Warranty and Homeowner’s Insurance?
As with a home insurance policy, a third-party company offers an extended home warranty in exchange for a specific amount of money and is subject to a deductible. However, the similarities end there.
Home insurance covers damage to your home caused by perils like water damage, fire, hail, windstorm, and vandalism. Comparatively, a home warranty is a service contract that helps cover home defects, including its major systems and appliances—but not windows, doors, or other structural components.
How Much Does an Extended Home Warranty Cost?
Like a home insurance policy, what you pay for a home warranty can depend on factors like the company you choose, the specific contract you purchase, and the property type (e.g., detached single-family, condo, townhouse, duplex). Unlike home insurance, a warranty’s price doesn’t typically hinge on factors like your home’s age or square footage.
With these details in mind, you can expect to pay between $300 and $800 per year for an extended home warranty and your contract’s deductible. Keep in mind you’ll also need to pay anywhere from $60 to $125 per contractor visit after filing a claim.
In some instances, companies will allow you to pay for your home warranty in installments, but the majority require lump sum payments for the entire annual contract term.
What Are Some Pros & Cons Related to Extended Home Warranties?
Like any other product or service, extended home warranties aren’t perfect. Here are some pros and cons commonly reported by consumers:
Extended Home Warranty Pros
If you have the money to pay their relatively reasonable prices upfront, home warranties can help provide peace of mind by acting as a buffer against surprise—and often expensive—losses to your home. If you own costly appliances or are too busy living your life to worry about these types of losses, including locating and scheduling contractors, home warranty contracts can deliver further value.
If you’re listing your home, purchasing a prepaid home warranty for your seller can also add to its value while helping to prevent the buyer’s complaints due to losses caused by undiscovered problems or defects.
Potential Extended Home Warranty Cons
Like any other service contract, if you don’t file any claims during your warranty’s 12-months period, you receive zero value in return for your money. In these instances, putting the same amount in a low-interest savings account as a rainy-day fund would deliver a higher return.
Even if you need to use your home warranty, one of the most prominent online consumer complaints is denied, or partially-paid, claims, regardless of the company. One of the biggest reasons for this is that these contracts exclude coverage for items that have not been adequately maintained, even if this lack of maintenance occurred before purchasing your home.
In fact, according to Investopedia’s Amy Fontinelle, “What is considered proper maintenance can be a significant gray area and is the source of many disagreements between home warranty companies and warranty holders.” In a worst-case scenario, unscrupulous warranty companies may use the improper maintenance clause as an excuse to deny valid claims,” she explains.
“In another scenario, the homeowner and the contractor who makes the house call may simply disagree over what constitutes proper maintenance.”
Sometimes, an entire appliance may be covered (e.g., refrigerator, hot water heater), but certain critical parts (e.g., icemaker, hot water tank) are not.
For these reasons, you must carefully read your contract’s terms and conditions before signing on the dotted line and handing over your hard-earned money.
How Can You Decide if You Should Buy an Extended Home Warranty?
Deciding between buying an extended home warranty and spending the money on something else primarily comes down to balancing the potential pros and cons, along with some quick math.
For example, let’s say your warranty costs $600, which you primarily buy to cover your expensive kitchen appliances. But after reading through the contract, you learn that it contains several $500 sub-limits for the items you’re most concerned about, in addition to a $300 deductible. Here, buying a home warranty might not make a lot of financial sense.
If you find that the numbers work, you must check out the company’s reputation on sites like the Better Business Bureau and Consumer Affairs. After all, any common complaints you encounter could indicate you’re likely to experience the same.
Finally, remember that your appliance manufacturers’ warranties could duplicate much of the coverage from your extended home warranty. Similarly, items purchased on a credit card typically comes with some level of warranty coverage.
How Can You Learn More About Buying an Extended Home Warranty?
Another quick and easy way to get help when deciding whether or not you should buy a home warranty is by reaching out to the professionals at IHS Insurance Group! We have decades of combined experience helping clients like you protect themselves and their assets at prices they can afford.
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