Renter's Insurance: A Comprehensive Guide

Most folks know that people who own their residences carry – in fact, are often required by mortgage companies to carry – homeowners insurance to protect their property, their possessions and any injury incurred by visitors. But what about people who are leasing their living space? Renter's insurance protects against loss or damage to your personal belongings when you occupy a rental property – anything from a studio apartment to an entire house or mobile home. Renter’s insurance can also provide liability protection for you in the event someone else is injured on that property.

Even if you're just starting out, or living in a place for a year, getting a renter's insurance policy – probably the least expensive and easiest-to-obtain insurance you'll ever own – could be a smart investment. You may not think you've got anything of great value, but you probably do – more than you could comfortably afford to replace in the event of a bad burglary or a fire. (According to the USAA insurance company, the average renter's stuff is worth around $20,000.)

In addition, no matter how careful you may be with your own apartment (the sort of residence most renters have), you can't control your neighbors. They can leave your security gates open, buzz ill-intentioned strangers into your building, or fall asleep with a cigarette in hand and start a serious fire. While your landlord's insurance may cover the building itself, that insurance will not cover the contents of your apartment, nor someone suing for damages if they had an accident within your apartment or rented space. In fact, many landlords are increasingly requiring tenants to carry renter's insurance.

At its most basic, renter's insurance covers the contents of your rented dwelling. Typical named perils covered include fire, theft, vandalism, plumbing and electrical malfunctions, certain weather-related damage and other named hazards. More specifically, a standard HO-4 policy designed for renters covers losses to personal property things such as:
 

• Fire or lightning
• Windstorm or hail
• Explosion
• Riot or civil commotion
• Damage caused by aircraft
• Damage caused by vehicles
• Smoke
• Vandalism or malicious mischief
• Theft
• Volcanic eruption
• Falling objects
• Weight of ice, snow or sleet
• Accidental discharge or overflow of water or steam from sources including household appliances, plumbing, heating, air conditioning or fire-protective sprinkler systems
• Sudden and accidental cracking or breaking of steam or hot water heating systems, air conditioning, or fire-protective sprinkler systems
• Freezing of plumbing, heating, air conditioning, fire-protective sprinkler systems or household appliances
• Sudden and accidental damage from artificially generated electrical current

Another common policy component will cover loss of use, meaning that if your unit becomes uninhabitable due to one of these covered perils, you'll be provided with some money to pay for temporary housing (but this should be specifically listed in the policy; if not, coverage isn't provided). Your renter's insurance may also cover the contents of your car and your luggage while traveling.

Most rental insurance policies have some liability coverage, so you will be protected up to a certain amount in the event that you get sued for an injury or other damages incurred at your home. It pays any court judgments as well as legal expenses, up to the policy limit.

You should be aware that there are many things that most policies do not automatically cover: backup of sewage into your residence, earthquakes, floods, and other "acts of God." These things can be covered for an additional premium if you feel you are at significant risk. Also, if you have any unusually expensive or valuable items like high-end electronic equipment, fine jewelry, musical instruments, or an important collection of art and antiques, you may need to purchase a rider or a separate policy to cover these items. In addition, a separate rider might be needed to cover wind damage in areas from hurricanes.

Renter's insurance policies also do not cover losses caused by the tenant's own negligence or intentional acts.

Assess Your Insurance Needs
When you apply for renter's insurance, it's a good idea to photograph or videotape everything you own. For expensive items, make sure to write down any serial numbers that could help verify your claim. You can even take it a step further and enter the items into a spreadsheet along with an estimate of each item's value. Although these steps take some extra effort, you should do them for two strong reasons.

1. You probably think that the total value of the items you own is less than it actually is, which puts you at risk of under-insuring yourself. When you make yourself sit down and assess the true value of each item you own individually, you will get a more accurate picture of what your belongings are worth. Perhaps you have around 50 Blu-rays, which may not seem like much to you, but at $20 apiece, you have a collection worth $1,000 that you won't want to have to pay to replace in case of fire.
2. While your insurance company probably won't want the inventory or the photographs when you take out the policy, your documentation will be indispensable if you ever need to file a claim because you will be better able to prove the value of your possessions. Make sure to keep copies of your inventory outside of your apartment, such as in a safe deposit box, with a trusted friend or relative, or emailed to yourself as an attachment, so that all your supporting documents won't get destroyed along with your belongings.

Choose an Insurance Company
Once you've figured out how much insurance you need, you'll be ready to locate insurance companies that offer renter's policies in your area. To find a company, you can simply do an internet search for renter's insurance and your state. Another approach would be to check with family and friends for recommendations and rates. Make sure to tell your insurance rep how you found them and if you have any other existing policies with them, because you can often get family rates or package deals (for example, if you purchased both home and car insurance together). Once you've located potential insurers, research the companies' insurance ratings through a company like A.M. Best, which rates insurance companies' ability to pay you when you make a claim.

Starting the Application
After investigating your options, it's time to start the application process. If several companies checked out financially, there's no reason not to apply to all of them to see which one can offer the best combination of low rates and solid coverage. Some companies may allow you to complete the entire process online. Others may want to speak to you on the phone or send you some paperwork to fill out. In most situations, it shouldn't be necessary to meet with a representative in person.

Fine-Tuning Your Policy
The application will be relatively simple to complete. The only questions that might trip you up are in regard to the type of construction of your dwelling, year built, and type of roof material used. For some properties, you can actually find this information on Zillow.com; if not, you can get it from your landlord.

The two types of coverage available to renters are actual cash value and replacement value. Actual cash value coverage pays what the property was worth at the time damage or loss occurred and is the least expensive type of renter’s insurance available. Replacement value pays the cost of replacing the items or property and is about 15% more expensive than actual cash value coverage.

Unless you're on the tightest of budgets, it's wiser to opt for replacement cost coverage. It ensures that if, say, your couch is destroyed in a fire, you'll receive the full $1,000 you'd need to buy a spanking new model instead of the couple hundred dollars that your old sofa was worth due to depreciation. While replacement cost coverage tends to be slightly more expensive, the difference in premium tends to be negligible when weighed against the huge increase in coverage you get.

This is also when you'll want to decide which deductible best fits your financial situation. As with all types of insurance, the lower your deductible, the higher the premiums, because with a low deductible, the insurance company will need to cough up more money in the event of a claim.

Deductibles can range from $500 to as much as $2,000. For example, esurance.com recently quoted an annual premium of $206 to cover a two-bedroom apartment in Santa Clara, California, with $35,000 in property coverage, $100,000 in liability coverage and $1,000 in medical payments with a $500 deductible. The same coverage cost $187 if the deductible increased to $1,000.

Consider how much you can afford to spend replacing your belongings in the event of a major loss, and then insure yourself for the difference. Your deductible can be as low to start, and you can always increase it later as needed.

Pay for Your Policy

Compared to homeowners insurance, renter’s insurance is relatively inexpensive. Rates vary from state to state, from company to company and, of course, are based on the amount of insurance and other factors, including the amount of the deductible you choose.

Renter’s insurance often provides substantial discounts for measures you take to lessen the risk to the insurer. These can include fire or burglar alarm systems, fire extinguishers, sprinkler systems or even dead bolt locks on outside doors. And, as mentioned earlier, you might get an additional break if you already are a policyholder with a particular company.

On average, according to Independent Insurance Agents & Brokers of America (IIAB), you can purchase $30,000 worth of insurance on your belongings and $100,000 worth of liability coverage for about $12 per month. The National Association of Insurance Commissioners places the average cost of renter’s insurance slightly higher, at about $15 to $30 per month. $20 to $25 per month is a typical range.

Insurance tends to be cheaper when you pay an entire year's premium at once instead of paying in installments, so if you can afford to pay annually, you should do so (insurance companies love to tack on administrative fees when you pay in installments). If you decide to pay monthly, be aware that some companies will require an automatic monthly withdrawal from your checking account.

Once you get your new policy in the mail, you'll want to read it to make sure that you understand exactly what is and isn't covered and that your policy states any non-standard additional coverage that you may have purchased. Also, make sure that your deductible and premium amounts are correct.

"What is renter's insurance?" is a fair question. But a better question might be, "Why should I have renter's insurance?"  Renter's insurance keeps accidents and annoyances from becoming bank account and budget killers. Remember your landlord's insurance protects his or her building; landlords do not ever cover your stuff. Only you can protect yourself.