A Complete Guide to Protecting Your Assets: Do You Really Need Renters Insurance?

Posted July 11th, 2012
by Staff Writer (no comments)

If you’re lucky enough to have never encountered it, visualize this — you come home from a week-long conference for work out of town to find a foot of dirty water on the floor of your apartment. The carpet is soaked, some of your furniture, books, and electronics have been water-damaged, and there’s a black spot on the ceiling indicating the source of your troubles. Mold and mildew have already started to collect. Suddenly, you’re overcome with horror as you realize that you neglected to buy renters insurance when you had the chance. Now, you’ll have to replace your damaged belongings out of pocket. You may not realize how beneficial renters insurance can be. Just like homeowners insurance, it is absolutely necessary to protect your assets in case of a disastrous situation.

Advantages of Renting Versus Owning

There are many advantages to renting versus owning a property, especially in the midst of a recession. Buying a house means putting a down payment on it which spurs on a mortgage, taxes, and maintenance without the luxury of being able to call your landlord when a pipe bursts or the air conditioning goes out. For some people renting simply makes more sense. Many young couples rent rather than buy a home because they don’t know where they’ll be in five years. Jobs could take them across the country. They could expand the size of their family, unexpectedly. Renting simply allows for more flexibility. Not to mention, if you’re renting at an apartment complex, many of them have attractive amenities. You could save on a monthly gym membership by utilizing your apartment complex’s workout facility, or work on your tan while lying out at the complex pool.

An Insurance Research Council poll found that only 43% of renters had renters insurance while 96% of homeowners have insurance on their home. Yet, Americans are choosing rentals over buying a home at increasing rates as a result of a poor real estate market. Going without coverage is risky business. The average premium for renters insurance in 2006 was $188 per year, according to the National Association of Insurance Commissioners. Considering the amount of protection you get from that coverage, the premium is well worth the expense.

The Basics of Renters Insurance

Renters insurance protects your belongings in the event of disaster while you’re leasing a home or apartment. The basic renters insurance policy is called an “HO-4″ policy. As a tenant, you may not think you need to obtain insurance because the landlord likely has insurance covering the property itself. However, the landlord’s insurance does not cover your assets. If your apartment complex or leased house were to burn down in a fire or become burglarized, you would be at loss for any missing or damaged personal belongings. If you purchase renters insurance, your policy will be outlined for you to clarify all of the perils your policy protects you against. Typically, these include things like fires, vandalism, water damage from faulty equipment, theft, and many other types of disasters that could jeopardize your personal assets. Renters insurance moves with you from property to property because it has no affiliation with the property itself — just your belongings. As a result, you may rest easy knowing your policy will apply to the various residences you inhabit.

You may be averse to paying for renters insurance because you see it as just another expense. Yet, renters insurance can be very affordable and is a necessary safety net. Nobody sees themselves as a potential house fire victim, but it happens every day. Renters insurance takes some of the stress out of a situation that could be wrought with tragedy; if you lose all of your high-dollar possessions in a robbery, the last thing you want to think about is how you will be able to replace everything. You will already feel attacked and vulnerable. Your renters’ insurance policy takes care of you in that time of need. You can control your policy’s affordability by coming up with a reasonable deductible for your coverage. The higher your deductible, the lower your monthly premiums will be. The deductible is how much you would pay out of pocket in the event of peril. For example, if your home flooded and all of your possessions were ruined amounting to $100,000 in damage and you had a $1,000 deductible, the insurance company would pay $90,000 and you would be responsible for the last grand.

Determining Property Value & Premiums

In order to determine how much you will be compensated in the event of property loss or damage, you will be required to come up with a value for your belongings. There are two methods for determining the value; in one system, you determine value for an item based on market pricing. This is referred to as the actual cash value. The actual cash value is determined by gauging the price for an item within the current market as opposed to the price it was when you bought it. Thus, an old DOS computer may have been worth significantly more when you bought it in 1998, but in 2012, it must be priced as its current value and not its original price. On the other hand, you may determine an item’s value by using a percentage that factors in the item’s gradual depreciation over time, which is known as the replacement cost. In some cases, using the item’s replacement cost can give you a better value than the actual cash value — that DOS computer may be valued higher when the percentage is applied than its market value. When you’re negotiating your policy, you will likely need to choose one value system over the other for all items involved, so it is worth your time to be strategic in your choice and discuss it over with your insurance agent. After a method is chosen, the policy will be written out for the value’s given amount.

The insurance company determines what your premium will be for your renters insurance coverage based on several different factors. The territory in which you live will be taken into consideration because some areas are more likely to come in contact with natural disasters. For example, coastal regions may be more prone to damage caused by hurricanes. The public fire protection class ranking — which is gauged on a scale between one and ten with ten being the worst — is also factored in. Your public fire protection class ranking is how well you are protected from a fire. If you’re far away from a fire department or are located at a distance from a water supply, the ranking will be worse. Furthermore, the construction of the building you live in affects your premium. The number of apartments in your complex, for example, is grouped with construction characteristics. Lastly, selecting any additional coverage will affect your premium.

Additional Coverage

Renters insurance also gives you the option of taking out personal liability protection. This type of coverage will protect you in the event that you are sued by someone else who is injured while at your residence and it is not subject to your deductible. For example, you may have a visitor over at your apartment that is bitten by your dog and requires stitches. The coverage could be applied towards medical bills incurred as well as legal costs. Personal liability protection usually comes at a minimum of $100,000. Likewise, if you are at fault for damage to the rental property, the landlord will use their insurance to cover the damage, but will come to you to cover the costs. With renter’s insurance, you won’t have to pay those costs out of pocket. When you’re at fault for the damage, your premiums will rise or your coverage could be dropped after the insurance company pays for the damage.

If a disaster occurs at your apartment or leased home that forces you to vacate the property until it can be addressed or repaired, you may also need a policy that covers additional living expenses. This can help you to cover the cost of a hotel, food, and other needs while you’re waiting for your property to become inhabitable again. Additional living expense coverage usually covers about 20% of your expenses. Likewise, you may have personal effects that you have upgraded over time. For example, you may have reupholstered a couch, which changes the value of the product from its market price. Such upgraded items may be subject to improvements coverage, in which 10% of your coverage goes toward a new altered item.

A basic renters’ insurance policy doesn’t cover earthquakes. If you live in a region where earthquakes are common, you might consider obtaining an earthquake endorsement as a supplement to your coverage. You should also consider a business pursuit endorsement, particularly if you work in your own home. Business materials that might otherwise not be covered by your policy or may only be marginally covered can be invaluable or even impossible to replace. The coverage might extend to the laptop itself that was damaged in a fire, for example, but not to the sensitive material on the laptop unless you have added a business pursuit endorsement to your coverage. Fine arts endorsements can be added for artwork or sculptures and such that are not specifically covered by your policy, especially if they are accidentally broken rather than stolen.

Common Restrictions to Look Out For

Any policy-owner should be aware of a couple of restrictions on coverage that insurance agents set for renters insurance. While most landlords are responsible for damage incurred to the property itself, some may only provide coverage for the exterior of a complex or leased home. In such an event, the landlord won’t replace carpeting, interior walls, and so forth. It is important that you make certain your landlord’s insurance covers the interior of your property before you sign a lease agreement. Your renters insurance won’t cover the actual property unless you have specified that as an additional policy, so you need to make sure that you don’t wind up having to pay for structural damage out of pocket.

You should also be aware that most renters insurance policies do not cover water damage caused by flooding, which may catch policy-owners by surprise. According to the Insurance Information Institute, water damage was responsible for 22% of all homeowners’ insurance claims in the United States in 2007. Yet, unless the renters knew to question their water damage coverage, they may have ended up with some out-of-pocket expenses. Renters insurance has some tricky stipulations about water damage. A good rule of thumb is that water damage that originates from below your property will not be covered, while water damage that originates above it will be covered. A burst pipe that causes a leak in your ceiling will likely be covered, while sewer backups and flood damage will not be covered. Oddly, the heavy rain that causes the flooding may be covered if it caves in or leaks into your roof.

This can be frustrating to policy-owners, since water damage is capable of causing incredible destruction to your property. Not only can it rot through wood and cause mildew and mold problems, but it can destroy your belongings that aren’t intended to get wet. If you live in a flood-prone area, you may need to acquire a separate policy to cover flood damage. The federal government’s National Flood Insurance Program provides sufficient coverage for those concerned about flooding in their home. According to their website, the average flood insurance policy costs $540 a year, which can certainly be worth it if you live below sea level. You can also usually purchase a sewer backup rider for your renter’s insurance policy for an additional annual cost.

Do I Really Need It?

You may live a frugal lifestyle with relatively few possessions and feel that renters insurance is an unnecessary use of your dollar. But, chances are that you do have at least a few valuable possessions. Commodities like a personal television, computer, jewelry, clothing, and furniture add up quickly to thousands of dollars, and most people don’t think out the cost of replacing all of those things at once. That is a reality you may have to face if your property is destroyed or looted. Renters insurance isn’t just for people who have fancy flat screen televisions and expensive stereo systems in their home. It can help with all of your personal property, no matter how old or inexpensive the item is. If you figure it in to your coverage, you will be compensated by your insurance company for it when it is gone and will be able to replace it much more easily than if you had to pay everything out of pocket.

Categories: Insurance Tips

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