Homeowners have the opportunity to buy home appliance and system warranties that are also known as Appliance and System Insurance. But, these “warranties” are not insurance policies. They are service contracts that cover your home appliances and systems such as heating ventilation, air-conditioning, hot water, electrical and plumbing systems. There is a great deal of debate among financial advisors and consumer advocates as to whether or not the service contracts make sense. Frankly, the decision is highly personal depending on many factors the most important one being, how risk averse are you?

What Isn’t Covered

These service contracts do not replace homeowners insurance and will not protect you against fire, a tree crashing through your roof or other perils covered by your homeowners insurance policy. Service contracts do not give you any liability coverage in the event that someone is harmed on your property.

Most service contracts require that in order for an item to be covered it must be properly maintained. This means for items such as your furnace and hot water heater you may be asked to produce maintenance records should the system need major repair or replacement.

What is Covered

Homeowners can choose levels of coverage.

Level I may only cover major appliances such as refrigerators and stones.

Level II may offer more protection by covering appliances and heating ventilation and air-conditioning systems.

Level III may provide the most extensive insurance by covering all the items in level II as well as homeowner’s entire electrical system and plumbing system.

When Does a Home Appliance and System Warranty Make Sense?

First let’s discuss when a service contract doesn’t make sense.

Renters never need a service contract

Buyers of new homes where major appliances have warrantees and the structure is covered by a builder’sguarantee do not need to obtain a service contract at this time.

If you’re a homeowner who doesn’t fall into either of the two categories above you may want to consider purchasing a home appliance and system warranty. Assuming you get a full warranty, that is a level III contract, you can expect to pay between $350-$500 per year. If you have a service call you will also pay in the neighborhood of $70 as your deductible. So, if you’re $1600 stainless steel gourmet stove stops working the warranty company will fix it, and if they cannot fix it they will replace it, for a total cost to you of $70 (and of course whatever your premium for the year is).

The warranty company is betting that homeowners will not have major repairs or replacements of appliances or home systems. The homeowner of course is betting that they will. As with all gambling bets one party has the advantage, and in this case it is the home warranty company. Basically the homeowner is protecting himself from a catastrophic loss. The protective nature of the warranty program is often confused with a typical homeowner’s insurance program, again it is not.

Folks who don’t like risk may find comfort with a home warranty program. Homeowners who are not handy may also find peace of mind by obtaining a service contract for appliances and major home systems. Folks in older homes with older appliances have at least an even chance of having to use a home warranty.

If you decide you want to buy a home warranty remember:

It does not replace homeowners insurance

Shopping around is a must

Once you have narrowed your search to a few companies call and ask for references you can speak to–reviews of most home warranty companies are very mixed. If you have questions as to whether your homeowners policy covers certain risks that are duplicated by purchasing a home warranty speak to your independent insurance agent before you make any changes in your comprehensive home insurance policy.