If you’re buying a new home, you’ve probably been advised to research insurance and warranty policies.
But it’s a mine-field.
Should you just go for the cheapest supplier, or do you plump for the most expensive – because they’re going to offer the most comprehensive deal, surely?
Buying a home is probably the most significant investment you’re ever going to make, so you’ll probably have shopped around (or are shopping around) for the mortgage that offers the best possible terms, the lowest interest rates, and the best protection should things go wrong. And, as a condition of your mortgage, you’ll have been told that you need home insurance. And your potential lender might suggest that you should also take out a home warranty policy.
All these decisions in one go!? Do you even know where to start?
What is the difference between a home insurance policy and a home warranty policy, and do you definitely need one?
What you should consider:
The potential costs of owning a home never stop. An important appliance might break down when you need it the most. Or a tree might topple and hit the front of the house. Will your finances stretch to an extra thousand dollars with no warning?
Home insurance and warranty coverage can help you plan for your financial future so that you can be sure that you’re going to have the level of protection you need: when you most need it.
In this article:
A Quick Comparison
What Is Home Insurance
Home insurance covers the structural integrity of the bricks and mortar element of your home (often referred to as “buildings insurance”) from accidental or age-related damage. It might also cover your possessions from fire, theft, and accidental damage (aka “contents insurance”). But you should never assume that it will cover both.
Your lender will expect buildings insurance at the very minimum. This protects the physical building if there’s a structural problem, occurring either as an accident or through age, and wear and tear.
Think about it…
The bank has given you the money so that you can live in this property. You’re going to pay for that home over the next 20 or 30 years. The bank has provided the means for you to live there, but they, essentially, own the house until you’ve paid your entire loan back to them. Naturally, as time goes on, you own more and more of that home, and the bank holds less; but until you’ve paid off your entire debt, the bank has a vested interest in that building.
They want to make sure that the building holds its value – otherwise, their investment is a bad one.
So, buildings insurance ensures that you can keep the condition of the home to a standard that’s not going to impact upon its value negatively. Obviously, other conditions affect the value of your bricks and mortar, such as the stock market and the locality, but in terms of physical condition, you have a responsibility to protect your (and the bank’s) investment.
When Can I Claim On Buildings Insurance?
If you spot a crack in the wall that grows over time, there could be a structural issue – subsidence, or a failed lintel, for example. Your building insurance should cover the repair.
If you run the bath and it runs over and the water floods into the kitchen below, damaging the ceiling and some of your appliances. Your building insurance could cover the repair.
Note that I say “could,” here, rather than “should.” Structural problems are usually covered – accidental might not.
It’s essential that you fully understand what your policy covers and what it doesn’t.
Never assume that you’re covered for all eventualities – if in doubt, you should ask.
Making a claim could affect the premium you pay for your coverage in the following year, so you should find out whether it would be cheaper to sort the problem out for yourself or to make a claim.
Most insurance policies have a call-out fee (or an excess) – this means that you pay the first $100 or so for any repairs and replacements; the insurance policy covers the rest (as long as you’re covered!).
Contents insurance isn’t usually a condition of your mortgage – the bank is only really interested in maintaining the potential value of the building.
Your home insurance policy may very well cover your building’s interior and exterior, as well as your contents. But it’s certainly not always the case. So you need to check.
Contents insurance usually covers your possessions from theft, fire, and accidental damage – but you should make sure that your most valuable items are covered under the policy. Consider engagement rings and expensive pieces of art – these might not be covered under the standard plan.
You might have to take out additional coverage.
Know What You're Paying For
While many insurers provide combined and comprehensive buildings and contents insurance, you should always ensure that you know what’s covered and what’s not.
Some insurers break their coverage plans into categories: Coverage A, for example, might protect your home, the principal dwelling, and any attached structures, such as garages, etc. But you might need Coverage B for safeguarding structures not connected to the primary residence; and further coverage, still, for personal property.
Be in the know
Know what you’re paying for. Speak to your insurer, and make sure that the items you rely upon most heavily are protected.
What Is Home Warranty?
A home warranty differs from your buildings and contents insurance because it covers your appliances – it’s, essentially, a service contract. Home warranties often cover repair or replacement of system components and appliances that might fail due to standard wear-and-tear or age.
Your washer/dryer might stop working, or a part on your HVAC might fail. Fixing or replacing large appliances can represent unexpected costs that could really make it feel like there’s a lot of month left at the end of the money; so it’s worth shopping around.
A home warranty is entirely elective – there’s no legal obligation to take out a policy – but if you don’t have one, you could be faced with a considerable repair or replacement bill when things go wrong.
What Does A Home Warranty Cover?
But, what’s most salient, here, is that you should check to see what your warranty covers. The most common error is that people don’t check what’s included in their policy, and they discover that they’re not protected when they need the help the most.
Every company has its own list of what it covers and what it doesn’t, and you should spend some time checking this before you sign on the dotted line.
There's A Maximum Coverage Limit!
Just because you’ve checked that your HVAC is covered, doesn’t mean that your warranty company is going to pay for the whole repair or replacement. Each policy has a coverage limit, and it varies between companies – so, again, shop around.
There’s also likely to be a cap on how much you can claim in a single year – so check your claim maximum because you might need to fund the shortfall.
Premium home warranty coverage is the highest level of service you can get, and generally includes all home utilities – such as electrics, HVAC systems, plumbing, and all kitchen and laundry appliances.
General Home Insurance/Warranty Advice
• Always check the level of cover offered before you sign up for any policy.
• Find out if there’s a deductible – a fee you’ll pay whenever you make a claim.
• For each claim, most insurers or warranty companies have a call-out fee, so find out what they charge for each call.
• If the call-out fee is $100, consider whether it’s actually cheaper to get the repair done independently. If a knob has fallen off the front of your cooker, you could probably replace it yourself for $20, so it wouldn’t be worth paying over the odds for your insurance or warranty company to sort it out.