A key element of living without financial anxiety is protecting your downside. Your home is likely your most valuable asset outside of your retirement accounts. You might wonder if purchasing a home warranty is a smart move. Let’s explore the details, including the pros and cons of buying a home warranty. Remember, there are no bad products – just appropriate or inappropriate.

As with any financial decision, the first step is to understand our decision. To map out the upside, downside, and costs, I talk about how do to this in Chapter 4 of my book Living with Financial Anxiety.

Home warranties can serve a key role in mitigating unexpected financial costs associated with home ownership. One way to think about a home warranty is as a potential stop-loss on home repair costs. Warranties can also be used by sellers to help alleviate a buyer’s fear. They can also be used by landlords to limit potential costs. Finally, warranties are a tool for homeowners to protect themselves from unpleasant surprises. Those selling a home use “home buyer warranties” as well.

Upside of Home Warranties:

There are several advantages to home warranties. They cover major expenses typically faced by homeowners, which a homeowner’s insurance policy typically would not cover. Such costs include replacing a busted refrigerator, buying a new dryer when that old one finally conks out, or expenses associated with fixing a central air conditioning system when it fails to turn on during a sizzling summer day. You can think of a home warranty as an extended warranty for all the gadgets and appliances in your house. Some warranties will even cover the cost of repairs related to plumbing and HVAC systems—another item usually not covered by your homeowner’s insurance policy.

Those are some of the pros of having a home warranty.

Downside of Home Warranties:

Now, let’s dive into some of the “cons.” There can be hidden “gotchas” with these policies. Home warranties provide coverage by contracting out the repair work. Like health insurance companies, since they are contracting in bulk, they get to dictate the terms. Often, the repair company is paid a flat amount regardless of the amount of time spent on the service—this incentivizes unscrupulous repair people to make shoddy fixes, or say they need to “send for parts.” Of course, they might never follow up when the parts “arrive.” Then when they call you back, you are hit with yet another service charge. They might even try to collect an additional fee when they perform the installation!

The bottom line: be sure to talk to your home warranty company to make sure you know and understand exactly the coverage and what to expect. If your repair does not go according to plan, call the company to verify it immediately. It is easier to make a fix the day it happens rather than weeks later.

Is it a good deal and helpful for someone in my situation?

This is an important question that must be answered when making a significant purchase. Your circumstances matter most. Here are some additional questions to ponder:

• Do you anticipate major household repairs soon?
• How do you feel about “re-certified or “refurbished” replacements?
• Are you okay with being out of an AC unit or other major appliance for a few weeks while it is repaired or replaced?
• Can you afford to fix a major appliance if it hits the fan?

A major household repair can be frustrating and stressful. A home warranty might seem like a helpful solution, and there are real upsides to consider, but you should also know about the risks of such a policy.

During retirement, limiting our downside risk is essential for success. While I am not advocating for or against home warranties, nor am I endorsing any specific company. It is a tool worth knowing about and considering.

I personally have benefited from home warranties in the past. When I first got married, I knew that our 30-year-old washer and dryer didn’t have much life left, and in all probability something else would go wrong in our 60-year-old home. The home warranty repaired and then replaced both our washer and dryer, after which I promptly cancelled it. As with all financial decisions, map out the upside, downside, and costs. Check out Chapter 4 of my book, Living with Financial Anxiety for more information on how.

To your success,

Leibel