Renters’ Insurance 101: What Every Renter Needs to Know
Most of us are familiar with the concept of homeowners’ insurance – insurance policies that generally cover repairs or replacement of the house itself and some or all of its contents. Mortgage companies require homeowners’ insurance to protect their investments in case something happens to your structure. But fewer people know about or get renters’ insurance, although more of the larger property management companies now require it to help protect them from liabilities that might be caused by the renters themselves.
Renters’ insurance is like a homeowners’ policy in that it covers personal property owned by the tenant, but does not usually provide coverage for the structure itself. For this reason, renters’ insurance can be much cheaper than a homeowner’s policy, but there are some special considerations to take into account before you sign up for a policy.
What is covered can be highly variable
Most renters’ insurance policies will only cover specific situations like fire, lightning, freezing of plumbing, weight of snow or ice, hail, windstorms, volcanic eruption, damage from the water heater or other appliances, and manmade perils including theft, vandalism, damage by someone else’s vehicles or aircraft, and riots. It is important to remember though that policies will typically cover you for damage caused by broken water pipes, but they won’t cover you for general flood damage. If one of these “named perils” occurs, the policy is designed to cover the cost to replace or repair your personal property, including clothing, computers, toys, furniture, artwork, jewelry, housewares, and collectibles. Be sure to carefully read the policy to know which perils are covered and which are not.
Find out what else is covered besides your belongings
Renters’ insurance policies are becoming more flexible and designed to meet the needs of renters who are facing situations that can cause a claim on the policy. Two things that many policies often include are coverage for the cost of living if your rental space becomes uninhabitable due to damage, and liability insurance which will cover guests who suffer property damage or injury for which you are legally responsible. This can include falls, dog bites, accidents and injuries. In some states, if you serve alcohol at a party at your home or apartment, the courts can find you liable for damages caused by one of your guests so good liability coverage can be an important asset to have.
The dreaded deductible
As with any insurance policy, a deductible will be set as the level of cash value that must be met before insurance payments begin. This means that if you have a $500 deductible and $2,000 in losses, you will be responsible for the first $500 in costs and insurance will pay $1,500. If you are getting the insurance just to protect your family from a big loss, you can set a high deductible which will lead to a lower monthly or annual premium on the policy. But this means that you won’t be able to use the insurance if you suffer minor losses, like the theft of a few things or a small fire.
The other important number to keep in mind is your coverage limit. This is the upper limit of expenses that a policy will pay, no matter how many things are lost or damage is done. If your personal property limit is $50,000 but you lose $75,000 worth of stuff in a fire, the insurance will only pay up to your agreed upon limit. Do note though that each category may have a separate limit, so while your property limit may be $50,000, your liability limit may (and should) be much higher to provide coverage against judgments in court and any legal expenses you may incur. The insurance industry recommends a minimum of $300,000 in liability insurance, but many policies will cover up to $1 million in medical and legal claims.
How will the policy pay a claim?
There are two popular approaches that insurance companies use when providing coverage of personal property. A replacement cost coverage system means that they will calculate the value of lost items as the cost of what it would be to replace those items with a comparable item at today’s market values. Whereas an actual cost value (ACV) system will reimburse you for the value of the item at the price you paid for it, less depreciation. You can see how those two systems could have a significant difference in payout when considering things like your personal computer, cameras, clothing, and appliances. Policies that utilize a replacement cost system will generally reimburse you more but will come with a higher premium.
Renter’s insurance may seem like a frivolous cost at first, particularly for a new family or individual, but the expense of having to replace all of your possessions, or to deal with a lawsuit, can permanently cripple your chances at future financial success. Renter’s insurance is certainly worth researching and considering, particularly when the costs of a policy may be very reasonable.