When I went to college, I took out a renter’s policy to protect my possessions because I was moving away from my home state and everything that was familiar to me. A renter’s policy only cost me maybe $12 a month and gave me a little peace of mind. I knew the monthly amount I paid could be used for other necessities like food or train fare, but I still paid to keep my policy. Until I didn’t.
In my third year, I let the policy run out due to a change in finances, and besides, I had never needed the policy before. Only a month after my policy ran out, I was robbed of my smartphone, my laptop, and my wallet. I was devastated. Not only were these my most expensive belongings, but they were also essential to my life both academically and professionally.
Had I still had my renter’s policy, my investment with those monthly fees would have financially reimbursed me for my losses. But unfortunately, that ship had sailed, and I had to sacrifice hundreds of dollars in a matter of days so that I could call my parents, contact employers, prepare for my midterms, and complete my projects.
Most people have strong opinions about renter’s insurance when it’s talked about. It’s misunderstood as either a necessity you’ll regret not having or as a scam to mooch off tenants. You can see, from my anecdote, that I’m now a little biased toward protecting yourself with a rental policy, but that doesn’t mean it’s right for everyone. So how do you decide that renter’s insurance is worth your money? Or even, how do you choose between potential plans?
In this article, we will discuss why people purchase rental policies, how coverage is broken down, and how to ultimately evaluate these parameters to decide if renter’s insurance is right for you. You can click on any sub-topics below to go to a particular section.
- What is Renter’s Insurance?
- Types of Insurance Coverage
- How to Buy Renter’s Insurance
- Value and Probability of Property Loss
- Who Needs Rental Insurance
Insurance may not be the most glamorous topic of discussion, but hopefully, you leave this article with greater understanding and more confidence toward making the decision that’s right for you. Let’s start by understanding what renter’s insurance covers.
What is Renter’s Insurance?
Renter’s insurance protects you in two ways:
- It protects against personal property loss or damage, and
- Covers the financial cost of any accident on your rented property for which you are legally liable.
Let’s take a closer look at these. Personal property loss or damage can be a consequence of any number of situations, but the most common ones are burglary, theft, or fire damage. There are various hazardous situations that are typically covered in a renter’s policy, and they include:
- Electric surge damage
- Ice, snow, and sleet damage
- Water damage from utilities
- Fire and lightning
- Falling objects
- Volcanic eruption
- Loss resulting from glass or any glazing material considered part of the building
- Vandalism and mischief
- Hail and wind
With a renter’s policy, I could have been financially reimbursed for my losses because a policy acts as an investment where I deposit a small payment to be used toward an emergency. In addition to property protection, renter’s insurance also protects your liability in the event of an accident. What does that mean? Let’s use some examples.
Let’s say you decide to have a movie night in your rented property with some friends, and at some point in the night, one of your friends trips on the corner of your rug and gets seriously injured. Sure, you guys are friends, and maybe you can settle the situation together. But if your friend decided to press charges (maybe for medical bills or not being able to work and get their paycheck due to the injury that occurred in your home), then you are legally liable for the accident.
Your renter’s policy comes in handy by diverting the financial responsibility onto the insurance company and therefore protecting you. Here’s another example. You live on the second, third, or maybe even fourth floor in your apartment complex, and you treated yourself to a waterbed. Gnarly. Until one day, it floods your apartment and causes water damage to the floors below you. Oops. That’s legally your liability, but with renter’s insurance, the financial burden can be diverted so that you’re not paying thousands to fix everyone’s leaky ceilings, floors, and water-damaged stuff.
Now that we know what a renter’s policy covers, let’s look at the types of policies.
- Actual Cash Value (ACV) coverage
- Replacement Cost coverage
The difference is in the amount they cover. Replacement cost coverage compensates you the amount you need in order to replace your lost or damaged possessions, whereas ACV covers the depreciated value of your belongings at the time they were lost or damaged.
Let’s say you lost your sofa in a catastrophic fire in your rental property, and you sought to replace it. If you have replacement cost coverage, you will be compensated the amount you initially paid for it when you bought the sofa, which is also usually enough for you to buy a new sofa today. If you have ACV coverage, you’ll receive compensation for the market value of the sofa on the day you lost it, which is probably worth less than you bought it for and definitely less than the amount you’d need to buy a new sofa.
It makes sense that most purchasers of renter’s policies will be pointed toward replacement cost coverage policies. ACV is still an attractive option if you are trying to save per month, as ACV coverage is typically cheaper than purchasing replacement-cost coverage.
How to Buy Renter’s Insurance
Now that we have investigated some basic tenets of a rental policy, the next question in determining whether a renter’s insurance is smart is how much a policy will cost you. An insurance agent can help answer your questions and point you in a helpful direction, but while we’re here, let’s go through how to make a rough estimation.
Step 1: Analyze your risk of liability damage
As we discussed, liability damages cover a range of potential scenarios for which you are legally responsible for the damage incurred. Think about your living space and the potential liabilities. Are you the guy with a waterbed on the second floor? That’s a liability.
Having any potentially dangerous pets, like a large dog, for example, can also be a liability, especially if you live near small children. It may be hard to imagine your sweet pet harming anyone, but if they ever get provoked and incur damage to property or people, you’ll want to have calculated them as a liability already.
Visitors are also a liability, per our initial example, and the more frequently you receive visitors, the greater the likelihood that a non-inhabitant will incur some injury. If you already recognize elements of your living situation as liabilities, then you definitely want to think about getting a rental policy; but for now, liability risk is just one part of the equation.
Step 2: Assess the value of your total possessions
You want to be thinking about the cost of replacing your life if, due to some catastrophe, you didn’t have the means to live your life as usual. The value of your total possessions should be an estimate, but this estimate includes everything and is probably higher than you think. If you don’t believe me, try this.
For one day, calculate your total cost just to do your morning routine. Your bed, the clothes you wear, the products you use, the breakfast you eat, and the appliances you use in cooking, everything. You’ll see the numbers add up quickly. Another trick insurance agents often use is simply shorthand each room’s value at $10,000.
Separate your estimate into the value of all of your “stealable” possessions and another for the total. Your “stealable” possessions mean anything likely to be stolen in the event of a burglary. So I immediately categorize my laptop and phone as part of my “stealable.” But TVs, jewelry, cash, or consoles are additional examples. Also, if you are a collector of art or possessions that incur value and are likely to be stolen in a burglary, include the value of these in your estimate. It’s important as a collector for you to regularly schedule appraisals of your collectibles so that your estimate is more accurate and you’ll be adequately covered in the case of a catastrophe.
Step 3: Estimate your risk of loss
This one is less fun, but it’s useful for you to understand your likelihood of suffering total loss. As we’ve discussed, the most likely causes are fire and burglary. To estimate your risk of burglary, sites like NeighborhoodScout can help you look up crime rates in your state and even specific areas. For the state of Georgia, for instance, there are 46 burglaries per 1000 people per year, making the risk of burglary about 4.6%.
Your odds of complete destruction due to fire will be around 0.3%. There are 105 million homes in the United States, and there are around 350,000 fires for which a fire department is necessary. Based on these numbers, there is close to a 0.3% chance of catastrophic fire in the home. We’ll stick with this number because while not every one of these fires will result in a total loss, it allows accommodation for additional obscure risks like falling objects or vehicle damage.
Step 4: Put it all together
Next, we’re interested in calculating your risk of annual loss and what that is worth to you. Probability is NOT the same as calculating risk. The difference is that risk takes the probability of loss and the estimated value of that loss if realized. It looks something like this:
Risk Factor = Probability X Value of Loss
This can be expanded to calculate what the risk of annual loss is worth. We already know that our risk of total loss (which we assign to our risk of catastrophic fire) is 0.3%, and our risk of burglary is 4.6%. For the sake of illustrating, let’s assign the value of total possessions at $15,000 and the value of “stealable” possessions at $5,000. Our equation will look something like this:
(.003 x $15,000) + (0.46 + $5,000) = $275
This takes 3% of your $15,000 value of total possessions and adds it to the 4.6% of your $5,000 value of “stealable” items to give you the annual cost of covering potential property losses or value of annual risk. Incorporating our earlier consideration of the risk of liability, this equation also suggests an insurance policy quoting $275 coverage annually.
Step 5: Choose an appropriate deductible
We’re not done with the insurance jargon just yet. A deductible is an annual amount you, as the insured, must pay before an insurance company pays your claim. Or you can think of it as the amount you, as the insured, must pay before the insurance company pays you back. A premium is the (usually) monthly amount you are charged by your insurance company for coverage. Typically, a higher deductible means a lower premium, but there are pros and cons either way.
When choosing a policy, you want to consider what deductible best serves your finances and living situation and provides you the closest to the ideal coverage you are willing to pay. Again, a licensed insurance agent will usually be willing to help explain your options to you and help you assess which decision is best for you.
In the meantime, let’s run through some of it ourselves. To estimate your appropriate deductible, start by comparing your risk of liability to your risk of total loss. Combining these, you’ll arrive at an appropriate estimate for your ideal deductible.
First, let’s look at legal liability coverage. For the sake of simplicity, we’ll talk about low, medium, and high legal liability and value them at $100,000; $300,000; and $500,000, respectively.
- Low liability ($100k) is for the individual with the least risk. This person does not live with relatives, receives few visitors, and has few dangers on their property, including no pets or potentially dangerous animals.
- Medium liability coverage ($300k) has a slightly greater amount of risk, meaning some potential dangers present, some relatives in the home, and consistent visitors to the property.
- High legal liability ($500k) has an even greater presence of the risk factors we’ve mentioned.
Bear in mind that there are even higher options for legal liability coverage that you may consider if you have all of these factors and heightened associated degrees of potential damages. From these, estimate which level of coverage is most relevant to you.
Next, let’s look at the value and probability of property loss. We conceptualize this by thinking of value distribution across your possessions.
- A first option is a large number of possessions with medium to high value. This means that a person has a large amount of value distributed across many belongings. This person requires the smallest deductible to protect their belongings because the distribution of value in this scenario is broad, meaning individual belongings are of a lower dollar value. A robbery, for example, is less likely to cause economic devastation because there are few possessions of significant value and significant amounts of possessions of moderate value. When selecting a deductible, this person will rely on the liability coverage they need, as property loss or damage is a comparatively lesser financial threat to them.
- Then a low number of possessions of medium to high value. This person, in contrast, has the same amount of value spread across fewer possessions, meaning the individual value of each possession is higher. This person is concerned with protecting their valuable possessions because a burglary could be catastrophic for them economically. Unless this person also requires high liability coverage, their deductible is more pertinent to covering property damage or loss.
- And finally, low value of possessions. Property loss or property damage would not significantly harm this person financially, and they may not even need insurance coverage at all because a deductible may be even more costly to them than paying for repairs and replacements for their property out of pocket.If this person still does wish to purchase rental insurance, their policy will be determined by their level of liability. If they have a low risk of liability, then insurance may be costlier to them than helpful. However, medium and high legal liability necessitate coverage, regardless of property value distributions.
Who Needs Rental Insurance
Putting these elements together, you should be able to estimate whether rental insurance fits your situation or not. Aside from weighing liability to property value, let’s be clear on who definitely needs to consider purchasing a rental policy:
- Families with children
- Anyone who runs a business from home (work and personal loss are conjoined)
- Dog owners
Rental insurance is an investment to protect what you have and where you live. Whether you’re wealthy and in a midtown apartment or a student living in a dorm and anywhere in between, burglary, fire damage, and liability can be financially catastrophic.
You now hopefully are better prepared to consider whether or not renter’s insurance is right for you, based on the factors we’ve discussed. We leave you with this advice: “It’s your world; protect it as you see fit.”