Today it seems every company you deal with wants to sell you some type of insurance for your car, computer, electronics and home.
When you purchased your home or when it was built new the builder most likely provided a free workmanship guaranty that also covered replacement of defective materials for the first couple years. Some items such as foundations or framing may be covered for up to 10 years and many of the individual systems and appliances that were originally installed had their warranty transferred to you when you bought the house.
With all or most of your home protected under manufacture’s warranties why would companies think they could get away with selling you a third party insurance program to protect things that are either already covered or long past the prorated replacement date of having any value? Most likely because offering such a program is pretty much free income for the insurance provider. The claims that can be filed under the insurance program never cover the full price of replacement and through statistics the insurance company knows just like a Casino they will always come out on top.
Lets Look At What Home Warranty Insurance Covers
At first glance of the insurance policy I just received it seemed like it may provide coverage for most of my home. Items covered included: Air Conditioning System, Furnace/Heating System, Plumbing System, Electrical System, Water Heater, Refrigerator, Clothes Washer and Dryer, Dishwasher, Range/Oven/Cooktop, Range Exhaust Fan, Built-in Microwave , Garbage Disposal, Heat Pump, Garage Door Opener, Ceiling Fans, Accessible Ductwork, Trash Compactor.
First we have to separate the appliances from the home systems.
Heat Pump, HVAC, Plumbing and Electrical Systems are probably the most expensive parts of the home however the Pipes in walls, Wiring and Ductwork almost never go bad. Notice Ductwork inside of walls is excluded.
Then we have larger appliances such as the Water Heater which usually comes with a 8 to 12 year manufacturer’s warranty and stove oven washer dryer that come with 1 to 5 year manufacturer warranties then the smaller appliances such as Garage Door Openers, Microwaves, Garbage Disposals, Ceiling Fans which are throw away items… if they go bad you buy a new one but they also come with warranties.
The Cost for the Warranty Insurance is $45 a month or $540 a year.
There is a $75 per item per service deductible so this basically pays for all of the smaller items. If a Garage Door Opener costs $150 and you have to pay a $75 deductible.
If a larger item such as your Water heater goes bad your manufacturer’s warranty should cover 6 to 12 years prorated parts and total cost of labor within that time period. If not then the $540 you paid plus the $75 deductible will definitely cover the total replacement cost of a water heater.
Washers, Dryers, Cooktops and Ranges all are similar to the $615 you will pay in a Years Coverage and a $75 deductible cost so you are completely covering their cost.
Where it gets interesting is in the cost for a Heat Pump, Furnace or Home Air Conditioner. These items can cost $2,000 to $10,000 to replace and may make you think about getting the coverage just for piece of mind. However remember that the units do come with a warranty and if they need service they almost never need total replacement. So what you are paying for is the replacement of parts that will be prorated. If you have a 10 year old Air Conditioning Evaporator unit (the box outside your house) then your coverage will take into account its age. If it needs to be replaced and the insurance company says these units have a 8 year life and yours is 10 years old then you will be footing the whole bill.
They Sell You Parts and Appliances
You should notice closely that in the warranty insurance you are likely to see a block of text that says if you need to replace your units or want to upgrade them then they will provide you “discounts” for new items through their “Network”.
Sounds good you can get discounts maybe but you will be restricted to their suppliers for replacement products and if you wanted to go with a brand you trust it may not be available.
Notice the term replacement with “LIKE KIND” this means they get to pick the manufacture and products they use when servicing your broken units.
They Use Their Contractor Network
When you need servicing of covered items the contractor that works in your home will be part of their Network. This is not necessarily bad often contractors are allowed to submit their companies for review and become members of the network but often the restrictions mean only national companies or larger regional ones will be able to comply.
Don’t expect the guy you usually get to be on the list… but as long as the work is done properly you should not have a problem.
Where is the advantage? The insurance company will pay a much lower labor cost and get a kickback of part of the labor in covering your repair or replacement. It means more money into the warranty fund and when things like ductwork or non-covered items need to be worked on you can expect to pay through the nose for them.
So, Is This A Scam? Or Should You Buy It?
It is very difficult to call it a SCAM but you need to understand all of your options and what the program covers in full detail before you can evaluate it.
Would any of these items be covered on a Second Home or a Rental Home that you own? Probably not and that is very important to check.
As we saw Ductwork for your Heating System that is not Exposed is not covered in the plan. You need to findout if other things such as Wiring inside of Walls or Plumbing that requires opening a wall is also not covered.
You will also notice that things like Faucets, Sinks, Toilets, Bathtubs and Showers are not covered. They are often high maintenance and so are Doors, Windows, Siding, Roofing, Flooring, Lighting and other parts of your home.
Will Roof Vents for your Plumbing or Chimneys for your Furnace be covered or just the heating and cooling unit. Vents often leak and this could mean repairs on your roof that include shingles and most likely that will not be covered.
There are a lot of things that are not covered in this program and you will pay over $600 a year before work even begins. That is no small amount and will cover repair or replacement of most items that are covered by manufacture or other insurance you already have.
Personally I think these programs are a waste for most home owners but the one really great thing they do is remind you of how much something may cost if it needed to be repaired or replaced.
As a home owner you should try to put a little money away in an emergency fund. This is very hard to do but this is basically what this insurance program is asking you to do.
If you can pay for this program then you can put the $45 a month in an expandable open ended Bank CD that you won’t brake until you need it for repairs. In addition to saving $500 a year you will also get a small amount of interest… and the money will be in your hands.
You might also want to call around at this time and price replacement of different items and visit your local supply store and see how much a water heater costs and what warranty is available.
Keep all of these things in mind then if you still think you need to buy the insurance go ahead.