How apartment renters insurance works

How apartment renters insurance works

With more people in the U.S. renting than ever, renters insurance has never been more relevant or more vital. Unlike in the past, there's no guarantee a steady job and college degree will lead to a house in the 'burbs. Prospective renters need to know the ins and outs of their policies, because they might be relying on that coverage for a long time.

So a renters policy is important, but what does it actually cover, and how does it pay out in the event of a claim? Let's take a look.

What renters insurance covers

A basic renters insurance policy covers the belongings you typically keep inside the home. When they get damaged, destroyed or stolen, your policy will pay for you to replace them.

(And just to be clear, although some people call it apartment renters insurance, you don't have to be renting an apartment to need it. Whether you're renting a studio, one half of a duplex, or a full house, you're still renting.)

Something many don't realize is that your belongings remain covered even when you take them with you outside of your home. If someone steals all of your luggage when you're traveling, for example, renters insurance will still apply.

If there's a time when you can't temporarily live in your apartment - due to a flood or a busted heater, for example - your policy will pay for you to spend the night somewhere else while your home is being repaired. There may be a deductible you have to pay, but it will help ease the inconvenience of a few nights in a hotel.

Most policies also have a liability portion that will pay for any expenses incurred by someone having an accident while at your place. It may pay for their medical bills, your legal expenses if they sue you and more. The liability aspect also covers damage your unit does to another, like water leaking from your apartment to your neighbor's.

Renters policies only apply to the individual or individuals listed, so if you have one and your roommate doesn't, their items won't automatically be covered.

Understanding how claims are paid

If a fire starts in your apartment, you may correctly assume that the renter's policy will cover anything damaged. But there are two different ways you can be reimbursed for what you lose, depending on the level of coverage you buy: replacement cost and actual cash value.

A policy that pays replacement cost will be more expensive, but that's because it pays better in the event of a claim.

For example, let's say the fire destroys the laptop you bought in 2012. If your policy pays the replacement cost of the laptop, you'll get what it would cost to buy a new laptop with equivalent or better specs today. However, if your policy only reimburses you the actual cash value, you'll receive how much that 2012 laptop is currently worth today after depreciation--which will not be nearly as much as you originally paid for it. Big difference, right?

When deciding which type of coverage to buy, it can help to think of it like car insurance - having comprehensive coverage is more expensive on a monthly basis, but pays out more in case you get into an accident. If you're insuring expensive things that don't depreciate well like electronics or luxury clothing items, you may end up happier with a policy that pays replacement cost.

Look closely at your policy

Reading your policy thoroughly is the first step to figuring out what's covered and what's not. Ask your insurance agent or broker for clarification if the legal jargon doesn't make sense to you. In particular, look for any exclusions that your renters insurance will not cover. For example, natural disasters aren't covered by basic renters insurance, so if you live in a place where there's a good risk of extreme weather, you may want to buy special additional coverage.

No matter what kind of policy you have, having a current inventory of what you own may be a lifesaver if you're robbed or your apartment burns down. Some estimates say that the average person has about $20,000 worth of items in their home. Getting all those belongings documented can help you figure out what you need to replace. It will also be handy if you have to file a claim, because the insurance company will want proof of ownership and in some cases proof of purchase for the items you've lost.

If you have expensive musical equipment or priceless antiques, it's even more important to have documentation. Send a copy of your inventory to your insurance agent so they'll have it on record in case something happens.

Some of those pricey items may exceed your policy's replacement limits; you'll have to purchase additional coverage if you want them insured.

It may seem like a lot of worry and fuss to properly inventory your belongings and purchase a solid renters insurance policy to cover everything, especially if you're young and lucky enough to have never had a domestic disaster like a fire, flood or robbery. But like all insurance, the idea is to buy affordable protection now so that you can have peace of mind for the years to come. And then if something bad does happen, it won't cost you an arm and a leg to start over.

Photo: Christina Murillo