Cost & Coverage
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How to decide if it's worth it to protect your stuff.
You’re all about building your financial safety net, right? Health insurance? You have it. Car insurance? Of course. Pet insurance?. Gotta look out for Fido (and your wallet). Life insurance? Now your family is protected for a few decades.
But do you really need renters insurance?
While 95% of homeowners have homeowners insurance, only 41% of renters have renters insurance, according to the Insurance Information Institute. It’s an often overlooked type of insurance, but it’s just about the most affordable protection you can buy. But if you’ve gotten by without it for this long, do you really need it?
Read on to find out:
Renters insurance covers the items in your apartment from damage and loss. Someone break into your apartment and steal your boombox? It’s covered. Upstairs neighbor’s pipe bursts, ruining your shag rug? It’s covered. Did fire take out the entire building, burning all of your possessions? Pull out your policy and be ready to make a claim.
It’s important to note that renters insurance doesn’t cover the physical structure of your building. Your landlord’s insurance will cover that. That’s the main difference between renters insurance and homeowners insurance: a homeowners policy will protect the actual building (like a tree falling on the roof) but a renters insurance wouldn’t.
Renters insurance is generally pretty simple but the details can get a little confusing, especially because the type of coverage you get depends on your policy.
So let’s go over some basic terms: An actual cash value policy means that your insurer will cover just that: the actual cash value of your items. That’s the current value; you may have paid a pretty penny for an original iPod 151 years ago, but if it’s stolen you’ll only get what it’s worth today.
A replacement cost value renters insurance policy, on the other hand, means that your insurer will cover the cost of repairing or replacing your belonging at its current price. If you have an old couch that gets damaged, your claim would allow you to buy a new one rather than pay the depreciated price of your current, damaged couch.
Because replacement cost value policies tend to pay out more (since they aren’t based on depreciated value), they also tend to cost more than actual cash value policies.
If you’ve had other insurance policies, you know what a deductible is. That’s how much you have to pay before your insurance will kick in. If your policy has a $1,000 deductible, you’ll need to cover $1,000 of repair or replacement before your insurance will cover any of it.
Perils are the types of incidents that your renters insurance will cover. On the flip side, exclusions won’t be covered. "All risk" policies cover any peril that isn’t specifically excluded, and "named peril" policies only cover what is explicitly listed in the policy.
Limits on renters insurance policies come in two different forms. Your policy will have an overall limit – say $30,000 worth of total coverage – and individual limits for expensive property. For example, there might be a limit on jewelry, so you can only claim $1,000 for a stolen wedding ring even if it cost $2,500.
Because of these limits, you might consider personal property endorsements, also known as renters insurance riders. This provides extra protection for specific items or categories (at an additional cost to your premiums). So you’d be able to add a personal property endorsement to that wedding ring to make sure you could cover the entire cost.
Finally, your policy might have additional living expenses coverage. If something happens and you need to spend a few nights in a hotel, your renters insurance would cover this.
If you don’t have (or don’t want) renters insurance, the most obvious alternative is to simply self-insure. That means you have enough money to replace any and all of your belongings out of pocket, since they won’t be covered by any insurance policy.
The problem with this is when people think think that they can self-insure. The value of possessions adds up a lot more quickly than you might think. If a pipe burst and ruined a lot of items, would you really be able to cover the cost of replacing a television, laptop, smartphone, clothes, and mattress, just to pick a few common items? You’d probably have to dip into your emergency fund, which you might think is fine – after all, it’s for emergencies – but you could have avoided it altogether with renters insurance.
If you own your home, you should really have homeowners insurance. As mentioned above, you’ll need homeowners insurance to cover the building itself. And if you’re thinking of buying a home, your mortgage lender will probably require you to have homeowners insurance anyway.
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If you’re on the fence about renters insurance, keep in mind that it’s a relatively cheap form of protection. The average annual premium in 2014 was only $190; that’s under $20 a month to protect your possessions. Plus, you can also get discounts if you bundle it with the other insurance types you have anyway, like car insurance.
And speaking of your possessions, renters insurance won’t just cover your things while they’re in your apartment. If you keep items in a storage unit, they’re protected there. On vacation? Your coverage extends to there, too.
Besides physical items, renters insurance also provides protection in other ways. Basic liability and medical payment coverage is standard in most renters insurance policies, which means you’re not on the hook for legal or medical bills if someone hurts themselves in your apartment.
As wide-reaching as renters insurance coverage is, it doesn’t cover everything. Flood damage isn’t covered by renters insurance, and renters insurnace doesn’t cover earthquakes, either. Unless you have a personal property endorsement on an item it won’t be covered if you simply lose it. Some pet damage isn’t covered, and some dog breeds won’t be covered at all.
Confusion is the biggest downfall of renters insurance. Between different exclusions and limits it can be a hassle to figure out what renters insurance covers. It shouldn’t be enough to put you off of buying a renters insurance policy, but it should cause you to carefully read through your policy.
Fewer than half of renters have insurance coverage, but according to a 2016 Federal Reserve study half of Americans don’t have enough savings to cover a $400 emergency. For renters who would have difficulty replacing expensive household items in the event of a calamity, renters insurance is well worth the low cost. Just the additional living expenses alone — that cash to cover your lodging in case a fire makes your place uninhabitable — can be worth it.
The psychology of insurance can make buying insurance seem like an optional luxury – so many of us don’t want to "waste" money on insurance and we bank on nothing bad happening to us – but renters insurance is so low-cost and provides such blanket protection that it really doesn’t make sense for any renter to not have it. Think of this way: if your apartment gets damaged by a fire, and your renters insurance pays for you to stay in a hotel for a few weeks, the $5 to $20 a month we spent on renters insurance will be totally, utterly worth it.