Think twice about purchasing a home warranty

Readers email me almost every week asking whether it's a good idea to purchase a home service contract, commonly known as a home warranty. 

As with any so-called extended warranty, my answer is that it's probably better to self insure by putting the roughly $200 to $800 you'd spend annually into a savings account or dedicated product repair and replacement fund. And I'm not the only one who feels this way. The non-profit Consumers' Checkbook gives the same advice in its home warranty coverage.

Admittedly, home warranties have an edge over many other types of service contracts. Instead of protecting a single product, such as your refrigerator or television, as other plans do, the coverage applies to a range of items, such as your appliances, home heating and ventilation system, plumbing and more, depending on the plan you buy. So if your air conditioner doesn't break, your washing machine or furnace might. That means there may be a better chance you'll use the coverage compared to a single-item service contract.

But there are drawbacks,as I point out in a recent story I wrote for Consumer Reports. Among them is that there typically are a lot fine print exclusions, stuff that isn't covered. For instance, depending on the plan, your refrigerator might be protected but not the ice maker, a component that suffers a lot of breakdowns. It's the same thing for your hot water heater. The heater itself might be covered, but not the tank – a not-so-reassuring  limitation when you're standing in a flooded basement late at night. 

And there's often an ambiguous "preexisting condition" clause, a kind of well-know-it-when-we-see-it exclusion that the company can use to avoid paying your claim. Keep in mind that the third-party technician the company will dispatch to evaluate the problem will be beholden to the warranty provider, not to you. 

Beyond that, service calls aren't free. There's usually a copayment ranging from around $75 to $125, depending on the company and plan. And you'll likely have to pay it even if it turns out that a breakdown isn't covered.

The result of all this is that there are lots of online complaints about home warranty companies, even those that have garnered good ratings from the Better Business Bureau. For example, over the last three years, the BBB has received nearly 10,000 complaints against the B-rated Memphis-based American Home Shield. 

Some warranty companies have drawn scrutiny from consumer agencies. In 2015, New Jersey-based Choice Home Warranty agreed to pay nearly $780,000 to settle a complaint by the state attorney general that the company "used creative and deceptive means to deny their customers’ claims." The company has a "C" rating from the Better Business Bureau, based on more than 4,000 complaints and an alleged advertising violation. 

What to Do

There are many reasons why it's best to skip a home warranty and put the money into a savings account or dedicated repair fund instead. Doing that, you'll retain the flexibility to use the money for whatever you want. Maybe you won't have enough serious breakdowns to justify the cost. Perhaps most of your stuff simply will become obsolete before you face major repairs, and you can use that saved cash to replace it. Or maybe you'll need the money for something else. Perhaps you'll lose your job or suffer a costly medical emergency.

And if something does break, self insuring will give you greater control. You won't have to worry about whether a problem is covered because of a preexisting condition or some other fine-print limitation. Maybe the item that malfunctions will be your car or something else that's not covered by the policy. And you can decide who will fix the problem, a technician that's beholden to you and not to a company that may be most interested in holding down its costs.

Of course, none of this means that no one ever benefits from home warranties. Along with the complaints, you'll find reviews from happy customers who say they've come out ahead.  But you have to consider the odds and the other demands on your cash. Remember, these companies aren't in business to pay out more than they're likely to take in.

If you want to purchase a home warranty anyway, it's essential to check out companies thoroughly and compare. Look for reports at the Better Business Bureau. Also, find out what others are saying by using a web search with the names of the companies.

Finally, check out the coverage carefully. It may be tedious, but it's very important to scour every bit of contract fine print. Pay special attention to what is and isn't covered. Then take some time to think about it.