Unlike auto insurance, renters insurance is a protection people rarely talk about. If a landlord does not require it, many people skip it.
Should they?
Let’s explore what renters insurance is, what it protects, and help you analyze your own situation to determine if you should purchase it.
What is Renters Insurance?
Renters insurance provides coverage for your belongings and liability protection in a home, apartment, or condo you do not own.
It’s similar to homeowner insurance, but it does not provide coverage for the structure of the building because renters don’t own the building. Instead, it protects the contents inside and the renter from liability if someone is injured on the property.
For example, if the home you are renting burns down and your stuff burns with it, renters insurance may pay out a certain amount to help you buy new things.
If someone slips and falls in your apartment and sues you, renters insurance may help defend you from a lawsuit and pay damages to the party suing you.
Types of Coverage in Renters Insurance Policies
Personal Property: covers the cost to repair or replace your items if they are damaged in a covered event, such as a fire, theft, and other circumstances.
How much personal property coverage should you select? The answer is fairly straightforward. You should make a list of everything you own in your apartment and the approximate value. Then, add the value of all those items. That is how much personal property coverage you should have.
If everything you own in your apartment is worth about $15,000, you should have $15,000 worth of personal property coverage.
If you decide to skip making a list, think twice. I find most people underestimate the amount of coverage they need. Think about your furniture, cookware, clothes, hobby items, etc. The value is usually significantly more than people would think.
The other thing to keep in mind is that your property is also protected property away from home. For example, if your laptop is stolen while staying in a hotel, your policy may pay. You should ask your insurance agent if there are any limitations.
Loss of Use: pays you for food, housing, and other items you need to purchase because your home is uninhabitable due to covered events.
For example, if your home suffers damage from a fire and needs to be repaired, the policy may pay for you to stay in a hotel while it is being repaired. It may also pay for increased food expenses above what you would normally spend for food.
For example, if you normally spend $400 a month on groceries, but because you no longer have access to a kitchen, you spend $700 on restaurants, you may be eligible to receive $300.
The insurance company will usually try to maintain your standard of living, which means if your home will take longer to repair, they may move you into a similar apartment instead of a hotel. For instance, if you were in a two-bedroom apartment, they will try to find another two-bedroom apartment. They won’t suddenly allow you to rent a nine-bedroom mansion and pay for it.
Again, I am of the mindset that more coverage is usually better. I find most people underestimate the costs if they suddenly needed to live in a hotel for a week or two or needed to rent a new place in a busy rental market. For example, if you needed to stay in a hotel for two weeks and hotel rates were $200, that is $2,800. It does not even include any increased commuting or food costs.
Many policies only cover expenses up to the limit or a certain time period such as 12 months. As with the nuances of any insurance policy, you should ask your agent about limitations.
Personal Liability: provides payment if you are found legally responsible for someone’s injuries or property damage. It can also help cover your legal expenses in a lawsuit.
For example, if your dog bites a guest while on your property or out in public and that person sues you, the personal liability will help provide for a legal defense and cover liability costs. If the attorney costs $5,000 and the settlement is $50,000, you would want at least $55,000 in personal liability protection.
Some insurers exclude certain dog breeds, which means you should check with your agent to see if your dog is covered.
As with other coverages, I prefer higher coverage because insurance is meant to protect rare, but catastrophic events. For example, if you only select $100,000 worth of personal liability protection, but end up in a situation where you are found liable for $500,000, you are going to wish you paid for $500,000 worth of personal liability protection.
It can also provide protection if your child is at a friend’s house and breaks a painting worth $30,000. In that situation, the personal liability may provide payment to cover the damage to the painting.
If you entertain people at your home or have an increased risk exposure, such as pets or kids, more personal liability protection is usually preferred.
Medical Payments to Others: provides payment to others for medical bills, regardless of who is at fault.
This is different from personal liability coverage because you don’t need to be found at fault. This can help provide coverage for a guest injured on your property even if you are not found at fault.
What is the Average Cost of Renters Insurance?
Renters insurance is inexpensive. Many policies can be obtained for $100-$200 per year depending on the coverage selected, where you live, and other factors.
According to Nerdwallet, the average cost of renters insurance is $168 per year. It’s based on a 30-year old with $30,000 of property coverage, $100,000 of liability, and a $500 deductible.
The cost has to do with where you live. If you live in a place prone to more natural disasters, your cost will likely be higher. Also, if you live in a place with high crime rates, your cost will likely be higher. Lastly, your cost will likely be higher if you have filed a claim within the past few years.
Since it is inexpensive, this is one reason not to skimp on coverage. Why pay $50 less per year if it could mean hundreds of thousands of dollars less in protection?
If you are looking at obtaining a policy and considering choosing less coverage, have your insurance agent run quotes. You may be surprised that increasing the personal property or liability coverage a little will hardly change the premium.
For around $15 a month, you can usually obtain good protection. That’s about the same cost as one restaurant meal per month. For the cost of one meal, you can potentially protect all your stuff in the event it is destroyed and have good liability protection. Why would you skip renters insurance?
Selecting the Right Deductible
The deductible is the amount you need to pay before your insurance company covers a claim. For example, if a fire destroys $10,000 worth of your stuff and you have a $500 deductible, you would need to pay $500 and your insurance company would cover the other $9,500.
Generally, the lower your deductible, the higher premiums you pay and vice versa. If you want lower premiums, you typically need to select a higher deductible.
The most common deductibles are $500 or $1,000, though some insurance companies will allow you to go to a $100 deductible and higher than $1,000.
You want to select an amount you are comfortable paying in the event something happens. For example, if you have $500, but couldn’t pay $1,000 if something happened and you needed to file a claim, you should select a $500 deductible. If you have the means to pay $1,000, you can consider the cost savings between a $500 and $1,000 deductible to see if it is worthwhile to select the higher deductible.
As you select a higher deductible, sometimes the decrease in premium is so small that people select a lower deductible. For example, if a $1,000 deductible only save $10 a year, some people may choose a $500 deductible and opt to pay an extra $10 a year because the $10 a year savings isn’t worth it to them when they consider they would need to pay $500 more in the event of a claim.
Whichever deductible you select, ensure you are comfortable paying it if you need to file a claim.
What does Renters Insurance Usually Not Include?
Renters insurance helps protect many events, but there are some things renters insurance does not cover.
For example, most policies will not include coverage for floods. Flood insurance is usually offered through the National Flood Insurance Program (NFIP).
Flood insurance is limited. The maximum coverage for a building is $250,000 and $100,000 for personal property. You can purchase each coverage separately, and each has separate deductibles. The building and personal property coverage are like two separate policies.
It’s important to note flood insurance only pays out if there “is an excess of water on land that is normally dry, affecting two or more acres of land or two or more properties.”
If you are interested in looking at your odds of a flood, this is a cool tool: https://floodfactor.com/.
Renters insurance usually does not include damage caused by earthquakes. Earthquake insurance is a rider you need to add to your policy or purchase an additional policy to protect against earthquake damage. Ideally, you would match the same coverage you have on your renter’s policy. Since the coverage is not protecting the actual building, only the contents inside, the coverage is much cheaper than on a homeowner’s insurance policy.
Another common question is, “If I live with roommates and my roommate has a policy, do I need a policy?” The answer is usually yes. Most policies only cover individuals or family members. They usually do not extend coverage to roommates automatically.
You often can add roommates to policies, but think carefully about that decision. If your roommate files a claim, that goes on your insurance record, which could make renters, homeowners, or auto insurance more expensive for you in the future. All claims go into the C.L.U.E. (Comprehensive Loss Underwriting Exchange), which is a comprehensive database of claims going back seven years insurers can use to set your premium. You can look at your own C.L.U.E. report here: https://consumer.risk.lexisnexis.com/.
Also, if you are not the one paying the policy, you are relying on another person to pay. If they forget to pay and you don’t have coverage, you could find out at the worst possible time of filing a claim.
Lastly, most renters’ insurance policies limit coverage for more expensive items. For example, most won’t provide protection for items valued above $1,000. Instead, you need to “schedule” certain property in the policy. A frequent example is jewelry. If you have a $5,000 engagement ring and the policy limits each item to $1,000 or less, the policy may only cover the first $1,000 if the engagement ring is stolen, which means you’ll need to pay $4,000 to replace it.
Common items that often need to be scheduled include jewelry, musical instruments, art, coins, gold, furs, guns, cameras, bicycles, and antiques. Basically, think of anything that is worth more than around $1,000, and it may need to be scheduled. Some policies allow blanket coverage up to $2,500 or even $5,000, which means you should check with your insurance agent to determine your limit and what needs to be scheduled.
If you schedule property, you should be aware that you may need to provide a recent appraisal. The insurance company often wants proof that you own the item and it’s worth what you say it is worth.
You can also consider obtaining a separate policy instead of scheduling it under your current renter’s policy. For example, I bought an insurance policy through Jewelers Mutual for an engagement ring.
Since insurance policies vary between insurers and state-to-state, read the fine print and talk with your insurance agent about various scenarios, such as an earthquake, and what would be covered.
Summary – Final Thoughts
Renters insurance is important coverage. We normally spend years accumulating stuff, and replacing it after a total loss could be very expensive. Plus, the United States tends to be a very sue-happy place. The liability protection in a renters insurance policy is also important.
When deciding a policy, there are a few questions you can ask yourself:
- How much would it cost to replace all my items if they were destroyed today?
- How much risk am I comfortable assuming?
- Do I have extra risk factors, such as kids or pets?
- Do I need to buy extra protection for earthquakes, floods, or more expensive items?
Lastly, remember renters insurance is fairly inexpensive. Don’t be the frugal person that tries to save $20 a year on a cheaper policy that could potentially expose you to hundreds of thousands of dollars in liability. There are plenty of areas in life where frugality pays, but renters insurance is not one of them.