Do you NEED Renter’s Insurance?

If you own a home, you NEED home insurance.

100%, without a doubt, if for no other reason than to protect your finances from catastrophic loss of real estate property (which can carry very high values) that could result from a fire, tornado, flood, or any other horrific and unpredictable event.

But what if don’t own the property and rent, instead? And all you have to worry about is the property inside the dwelling. Should you buy renter’s insurance then?

You know I’m all for cost cutting, but before making any judgments, lets first look at what renter’s insurance is and what it covers.

What is Renter’s Insurance?

renters insuranceJust like with homeownership, a lot of stuff can happen that is out of your control and unpredictable – your neighbor across the hall decides to deep fry a frozen turkey indoors, the electrician wired the place incorrectly, a water main breaks and floods lower levels of the building, you leave a door cracked open and someone steals your laptop and TV, or a tornado comes through. You never know. And that’s the point of renter’s insurance (and insurance in general). Renter’s insurance is designed to protect the value of your lost property and from liability and additional expenses when shit happens.

Most renter’s insurance policies cover you against losses from smoke and fire, windstorms, lightning, theft, vandalism, explosion, and certain types of water damage (burst pipes, water left on, etc.).

Renter’s policies can also cover (usually as a %) possessions you have away from home (i.e. in your car or at work), so there is some extra value there.

What disasters does renter’s insurance not cover?

Most policies do not cover floods. Flood coverage is available from the federal government’s National Flood Insurance Program and for extra premium amounts from a few private insurers.

Also, note that many renters are under the mistaken impression that a landlord’s insurance policy will protect them in case of a flood or fire. It doesn’t (it only protects the landlord’s property and possessions). If you live in a furnished apartment or home, the furnished goods should be covered by the landlord’s policy but all of the items you brought in would not be covered.

What Does Renter’s Insurance Cover?

Renter’s insurance generally covers three things:

1. Personal property: This is all of the stuff you have in your apartment. Homeowner’s insurance policies cover this, typically as a percentage of the home value. But since you don’t own the property you rent from, you get to choose the value of personal property that you want to insure against. Note that many expensive categories like jewelry, sporting goods, and musical equipment have limits or caps on how much will be covered. If you want to insure above those caps, you have to purchase a “floater” (aka “endorsement”) in your policy to cover the additional valued amount.

There are two types of personal property renter’s insurance coverage, and the distinction between the two is key:

  • Actual Cash Value: Pays to replace your possessions up to the limit of your policy, minus a deduction for depreciation.
  • Replacement Cost: Pays the real cost of replacing your belongings (regardless of depreciation) up to the limit of your policy. As a result, these policies typically have higher premiums.

2. Liability: Renters insurance policies don’t just protect your stuff. Renters insurance that comes with liability coverage shields you from paying medical and legal expenses if someone gets hurt in your apartment or if you are responsible for stuff that happened to others as a result of your action (i.e. leave the burner on and it causes a fire that causes injury to another).

Most standard renters insurance policies will generally provide for at least $100,000 of liability coverage, but you can purchase more.

3. Additional Living Expenses (ALE): What happens if your apartment complex burns down in a fire? Not only would you lose your property, but you’d have unexpected living expenses associated with the logistics of being without your apartment. This could include hotel bills, temporary rentals, restaurant meals and other expenses you incur while your home is being repaired or rebuilt.

Renter’s Insurance Premium Costs

Just like with home, auto, and health insurance, renter’s insurance coverage is paid for through a monthly premium charge to the insured person. You also choose a deductible level, which you pay in the event that you file a claim. The higher the deductible, the lower the premium, and vice versa.

Premiums vary greatly, because they take in to account a number of factors:

  • location
  • how much property coverage you want
  • how much liability coverage you want
  • whether the policy covers actual cash value (depreciated) or replacement cost
  • if you have any special floaters or endorsements
  • your chosen deductible
  • renter’s insurance discounts are given for safety features in the home/complex (i.e. sprinklers, fire alarms, deadbolts, an attendant) and even good credit standing and age

A basic renters insurance policy — with $10,000 in personal property coverage and $100,000 in liability coverage — costs about $120 a year through large insurers like Allstate, State Farm, or Liberty Mutual – which is pretty darn cheap. Almost all of the well known insurers offer renter’s insurance policies.

Like all insurance policies, the best thing you can do for yourself is to shop around and get quotes from a number of different insurance providers, before purchasing a policy.

Should you Buy Renter’s Insurance?

You may not have a choice on whether or not to buy renter’s insurance, if your landlord requires it. Many do. However, according to the Insurance Information Institute, only 46% of renters buy renter’s insurance.

I’ve never taken out a renter’s insurance policy. And while renting for a number of years, never had a situation where I needed it. However, like all insurance offerings, you usually don’t know how badly you needed coverage until you actually need coverage. If you’ve never used your policy, it may seem like a complete waste. But if your house was blown away by a tornado, your complete financial well being may be preserved through an insurance policy.

So should you buy renter’s insurance?

Start by calculating the value of your personal possessions. Here’s a home inventory checklist you can use to keep track of all of your possessions. Or you could simply start from scratch using a Google doc or Excel spreadsheet. Estimate how much the item would cost to replace and its present worth. The less you own, the less your premium would cost and probably the less you need renter’s insurance.

Once you have calculated the value of your possessions, you’ll get a much clearer perspective on the value of renter’s insurance to you.

The anti-consumer in me just wants to say, “don’t buy renter’s insurance – just own less stuff and problem solved” – but I’m a bit torn on this one. An umbrella insurance policy might be more cost effective for those wanting larger liability coverage, who do not have the need to insure many possessions. But if you just want modest liability coverage and you have enough belongings that it would create financial hardship for you to replace them in the event of total loss – then renter’s insurance makes a lot of sense.

In the grand scheme of total cost of living, renter’s insurance can be pretty cheap for what it offers. Lets put it this way – there are a lot worse things you are probably paying more than $10-20 per month for than renter’s insurance.

Renter’s Insurance Discussion:

  • Have you purchased renter’s insurance and ended up using it? Share your story.
  • Yes or no: you need renter’s insurance? What’s your take?

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