The average home warranty costs around 50 dollars a month. Premiums will be higher for older homes where the appliances are prone to break. Premiums will be higher, too, if you choose to have it include your pool pump and irrigation system as well as the dishwasher and air conditioner.
But what is the value proposition for home warranties? How much money can I save with a home warranty?
The Savings on Equipment Replacement
This is probably the biggest reason to consider a home warranty. Your emergency fund might pay for replacement parts on a washing machine or air conditioner, but you probably don’t have enough money saved to buy a whole new one. Home warranties typically have strict rules on when the appliance or HVAC equipment can be replaced. In general, the replacement is only allowed if the repair costs almost as much as a new item or there have been several attempted repairs. When equipment replacement is necessary, you will generally get that years’ worth of premiums and more back. The returns are greatest on big ticket appliances like refrigerators and HVAC equipment.
Note that home warranties replace like with like. If you have a basic refrigerator, they’ll pay to replace it with a basic refrigerator. If you go for the deluxe model, you’ll pay that price differential out of your own pocket.
The Savings on Repair Bills
Home warranties don’t pay for every service call to your home. You typically have to pay for seasonal checkups like changing the air filters in the HVAC and checking the furnace for cracks. Your warranty won’t pay to clear the clogs out of the garbage disposal or dishwasher, either. For real repairs, the service fee could be anywhere from 20 to 150 dollars. Parts are generally extra. The warranty company may pay for the labor and parts if it is a covered repair or they may provide cash reimbursement up to their warranty limit on that type of repair.
How much money do you save with home warranties? Reports show that the average home warranty customer has 1.5 claims a year. These are typically repairs, not replacements. If the claim is covered, it can reduce the price you pay for the service. The savings are greater if the repair person is in a network and essentially providing a volume discount to warranty customers.
The Intangible Benefits
It is harder to assign a value to the ongoing maintenance that a home warranty incentivizes you to keep up with. For example, your home warranty may not cover a dead AC compressor if you haven’t been changing the filter or having it inspected twice a year by a licensed HVAC tech. That maintenance is an investment in the life of the equipment. This typically extends the life of the unit and reduces the need for repairs. The hard part is quantifying it.
Actuarial researchers have done this on behalf of the warranty company, but they’ve also shifted the HVAC inspection costs to you, as well. In general, we think that these almost intangible benefits are similar in value to the warranty itself, especially as your home ages. After all, you can put a price tag on keeping warm with electric heaters while paying for emergency furnace repair, something you defer by a year or three by investing in maintenance you keep up so the warranty will cover the furnace repair when it dies.
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