How Renters Insurance Premiums are Calculated
You may not be aware of this yet, but if you live in a rented home or apartment your property is stolen, lost or damaged, you won’t be compensated under your landlord’s homeowners insurance policy. For your property to be covered, you need a special type of insurance known as renter’s insurance. Luckily, renter’s insurance is far less expensive than homeowner’s insurance as its premiums usually range between $15 to $30 per month.
The rate you end up paying depends on various factors which we will look at later but first, let’s look at how the rate is calculated when you first go to purchase renters insurance:
The renter makes a list of all the items they want to be covered.
When you go to buy renter’s insurance, the insurance company will want to know which items you need the policy to cover and their value. For this to happen, the renter has to go through a documentation process where he/she makes a list of all the items in their rented home that they want to cover from room to room. The list should include the prices for the items and receipts if available. The items you need to document includes things like electronics, furniture, clothing, and other possessions. If you own any valuable items such as jewelry, collectibles or expensive art pieces, you may need a separate list for this as you will need to purchase additional coverage.
Once you have submitted the information, the insurance company will consider the following factors before deciding your renter’s insurance rate:
a) The total value of the property the renter intends to cover – this is the main thing that insurers consider. For instance, a renter with valuable possessions worth $300,000 will need to pay more for coverage than a renter with $100,000 worth of possessions.
b) The deductible – when buying renters insurance, you can include a deductible to reduce the amount you will be paying in premiums. The higher the deductible is, the lower your rate will be. However, it’s vital to choose a deductible amount that you can afford to pay out-of-pocket when needed.
c) Type of coverage – there are two types of coverage; replacement cost value coverage and actual cash value coverage. Replacement cost value coverage is the better choice since, in the event that your property is damaged, your policy will pay you the cost of replacing the damaged item while brand new. Actual cash value coverage is cheaper, but it only pays you what your damaged property was worth at the time of damage (cost of a brand new item less depreciation).
d) Your location – the location of the renters home matters because it determines the kinds of dangers they are exposed to. For example, a house in a high crime neighborhood will attract higher renters insurance rates than one in a safe neighborhood.
e) Smoking status – a renter who smokes is at more risk of setting off a fire, thus their rates are higher than non-smokers.
f) Credit score – excellent credit scores attract lower rates.
How does renters insurance work?
Most homeowners know that they’ll need to buy homeowner’s insurance to cover their home structure and personal belongings in the event of a break-in, fire, storm, or any other disaster that causes damage. Most renters, on the other hand, never think of getting insurance especially since most of them assume that their property is covered under their landlord’s insurance. For your personal belongings in a rental property to be covered, you will need to buy renters insurance.
What is covered by your landlord’s insurance?
A landlord’s homeowners insurance typically covers
a) The home structure – the policy covers the physical building if it’s damaged by a fire, hailstorm, windstorm, or other natural disasters.
b) Other structures – structures erected on the property such as the fence, detached garage, or a shed may also be covered by the landlord’s policy.
c) Personal property – the landlord’s policy covers their personal possessions at the rental property like the backup generator, tools they keep on-site, and other things.
d) Liability – the landlord’s policy covers injuries that happen in the common areas of their rental property.
Since tenants are always moving in and out, it would be impractical for the landlord’s insurance policy to cover the tenant’s personal property since the landlord has no idea what each tenant owns. The tenant’s personal property belongs to them, not their landlord. Therefore, if the tenant feels the need to protect their personal property, they should take it upon themselves to buy renters insurance.
What does renters insurance cover?
A renters insurance policy is a lot more basic and a lot cheaper than a homeowners policy since the tenant does not own the physical structure. Renters insurance covers the following
:
a) The tenant’s personal belongings – the policy covers the value of a tenant’s possessions. The higher the value, the more expensive the policy is.
b) Liability – if a person is injured in a renter’s home or the tenant causes damage to a guest’s personal property, the renters' insurance policy will cover the liability of the renter.
c) Alternative accommodation – if you are not able to return to your rented home after a fire or natural disaster, your renter's insurance will cover the cost of alternative accommodation.
How are renters insurance rates determined?
On average, the cost of renters insurance with a $1,000 deductible, $40,000 of personal property, and $100,000 liability coverage is about $17 a month or $197 per year. It can be lower or higher than this amount depending on these factors:
a) Coverage amount – the higher the coverage amount, the higher the premiums.
b) The deductible amount – the deductible is what the renter pays first towards a loss before their renters' insurance policy kicks in. the higher the deductible, the lower the premiums.
c) Type of coverage – there are two kinds of coverage for renters insurance – actual cash value and replacement cost value coverage. The former covers the cost of replacing an item for what it was worth at the time of damage, not what it was worthwhile brand new. Replacement cost value coverage compensates you for the cost of buying a brand new item of comparable quality, value, and function.
Is renters insurance important?
No one will force you to buy renters insurance, but you will be glad you had it in the event that something happens to your personal belongings in a rented home.
What is covered under a basic renters insurance policy?
Millions of people live in rented homes and apartments, yet less than half of them have no renter’s insurance. A good percentage of them do not even know that renter’s insurance exists. A lot of the people who don’t have renter’s insurance falsely believe that somehow, their property is covered under their landlord’s insurance policy. This is far from the case since the landlord’s insurance policy only covers their building and other belongings in that building such as the security system, tools in the shed, backup generator, and other things.
To ensure that your property in a rental home is covered, you need to buy renter’s insurance. The following is a breakdown of what’s covered by a basic renter’s insurance policy:
1. Personal property coverage
Picture everything you own in your rented home; your tv, furniture, kitchen appliances, clothes, shoes, precious comic book collection, and other items. Think about how much you’ve spent to date to buy all those items; is it thousands, tens of thousands, or even hundreds of thousands? Now picture a fire starting in your kitchen and burning down all those possessions into ashes.
In this scenario, if you don’t have renter’s insurance, you might as well say goodbye to all those items since no one will compensate you. However, if you do have it, the personal property coverage aspect of the policy will cover the cost of replacing your stuff saving you from massive losses. Renter’s insurance ensured that your personal property is covered if it’s lost, stolen, or damaged by fire, hailstorms, or other disasters. It covers you up to the limits set in your policy. If your property is worth more than the limit, you should buy additional coverage to ensure that everything is covered.
2. Liability coverage
This provides coverage against certain costs if you are found legally responsible for any injuries sustained to other people or damage to their property in your rented home. For instance, if you invite a friend over and he/she slips and falls down the stairs breaking an arm, your renter’s insurance will cover their medical costs and legal costs if they decide to sue.
In another example, if your dog destroys a neighbor’s property, they can sue you and your renter’s insurance policy will cover your liability and legal costs up to the limits set in the policy.
3. Additional living expenses
If your rented home or apartment is damaged by a fire, hailstorm, tornado, or other disasters, it may be rendered uninhabitable for the period during which repairs are being done. Renter’s insurance covers you for the costs you will incur as a result of having to seek alternative accommodation, increased cost of food above what you normally spend, increased cost of transport, and other expenses that arise as a result of damage to your home.
Conclusion
Renter’s insurance is vital since when disaster strikes, it can really save you from financial ruin. However, since insurers and policies differ, it’s always important to ensure you get a renter’s insurance policy that covers your unique needs.
