What is Renters Insurance and How Does It Work?

When you buy a renters policy from an insurance company, you are buying coverage that pays the costs to replace your personal property in the event that damage to the property causes damage to your belongings.

Many renters believe that their landlord would cover the cost to replace their personal property if it was damaged due to a disaster such as a fire. This is not true. Your landlord will have an insurance policy that will cover the property that you are living in, but not any of your personal belongings.

If you want your personal property to be covered when you are renting, it is a good idea to buy a renters policy. It is also important to understand that the amount of money you would receive depends upon the type of renters policy you have. There are actual cash value policies and replacement cost policies.

Actual cash value coverage - An actual cash value renters policy covers the cost to replace your damaged property minus depreciation. For example, let's say that there was a fire in the apartment you were renting that destroyed some of your personal property including your TV. Let's assume that you bought this TV a couple of years back for $1,000. Let's also assume that the TV went down in value (depreciated) by $100 per year.

Your insurance company would look at the original value of the TV and subtract the depreciation of the TV to find the appropriate pay out. In this case it would be $800 ($1,000 original cost minus $200 of depreciation over 2 years).

Replacement cost coverage - A replacement cost renters policy covers the cost to replace your damaged item with the current market value of a new item that's identical or similar to the one you lost. Let's use the TV example above. If your 2-year-old TV that is now worth $800 would cost $1,000 to replace with a new model, you would get a check for $1,000.

An actual cash value policy is going to be cheaper than a replacement cost policy as the payout will be lower once the insurance company deducts depreciation. A replacement cost coverage policy will be more expensive but will have a higher payout.

Renters insurance is among the most affordable types of coverage. If you own valuables such as electronics or jewelry it can be worth it to spend a little bit more each month for replacement cost coverage knowing you will get a higher payout.

Personal property coverage is the main coverage that is associated with renters insurance. It covers all your personal property within the apartment, condo, or home that you are renting. This can include your furniture, clothing, kitchen, electronics, and others which are covered up to the limits of your policy. Your renters policy would typically cover you in these events.

- Fire or lightning

- Smoke

- Windstorms and hail

- Explosions

- Theft

- Vandalism

- Weight of ice, snow, sleet

- Sudden damage from a power surge

- Volcanic eruptions- Falling objects

- Water overflow or discharge from household systems

- Freezing of household systems

- Sudden tearing, cracking or bulging of a hot water, steam, air conditioning or fire protective system

- Riots

- Damage from aircraft or vehicles

Loss of use coverage pays to cover the cost of a temporary place to live if where you live becomes uninhabitable due to damage. Loss of use coverage can pay for hotels, rent at a different apartment or home, increases in food costs if you have to eat out from losing your kitchen, and other expenses as a result of not being able to live at your primary residence.

For example, let's say that you were renting a condo and a fire broke out causing damage that made the home uninhabitable. If you had a renters policy you would be able to file a claim and get compensation to temporarily relocate some place else as the damage to your condo was fixed.  

Personal liability coverage protects you if you, a member of your household, or your pet cause damage to another person's property or cause injury to the person themselves. For example, let's say that a guest came over to the home you were renting, tripped on an extension cord and broke their wrist.

This person could sue you for medical expenses since it happened within your home. In this instance, your liability coverage on your renter's policy would help pay for any legal defense and medical bills that your injured guest had.

Personal liability coverage can also cover you in some instances when the damage did not occur in your own home. For example, let's say you are throwing a baseball with a friend outside and accidentally break your neighbors window. Your renters policy could cover the cost of this damage.  

Like liability coverage, medical payments coverage pays out if someone is injured on your property. Medical payments coverage will pay out no matter who is at fault, whereas personal liability coverage will only pay out if you are at fault. Keep in mind that this coverage does not cover you or members of your household. It only covers other people.

1) Other people's property - Most renters policies will cover other people's property in addition to your own if it is in the residence you rent. For example, lets say that a friend loaned you their laptop and then a fire broke out in your residence, your policy would cover your personal property and your friend's laptop up to the limits of your policy.

2) Items stored elsewhere - Many renters policies will cover your personal property even if it is not directly stored at the residence you are renting. For example, you might keep additional furniture in a storage unit away from your residence. Most renters policies would still cover this furniture even though it is not in your primary residence. Some renters policies will even cover items stolen from your car.

Renters policies can cover you in most common instances, but like any type of insurance, there are limitations. Many renters policies limit coverage for certain high value items like jewelry and exclude coverage from the following instances.

- Floods

- Sinkholes

- Earthquakes

- Terrorism

- Bed bugs or other pests

- Damage to or theft of your car

- Damage to or theft of your roommate's property

Renters insurance is not legally required by state or federal law, but it is often a requirement by landlords as part of your lease agreement. Landlords will often require you to obtain renters insurance to protect them from liability.

For example, if your personal property was destroyed by a fire and you did not have a renters policy, your landlord might be worried about a lawsuit. If you have renters insurance, your personal property will be covered and your landlord's insurance will only be responsible to repair damage to the property itself.

Even if it is not a requirement by your landlord, obtaining renters insurance is still a good idea. Renters insurance is very affordable and protects your property and shields you from liability. You might think that your property is not worth much, but if you had it all up it is worth thousands of dollars. Paying $10 a month can often be worth it to protect your property.

1) Personal property coverage - You can typically have as much or as little personal property coverage as you need. It is a good idea to take an inventory of all of your personal property within your residence and estimate the total value.

You can go into each room in your residence including your bedroom, bathroom, kitchen, dining room and living room to make sure you inventory each item. Try to estimate what it would cost to replace every personal belonging you own within each room and add up the total of each room.

For example, if you walked into your bedroom consider adding up the total value of your clothing, furniture, decorations, and electronics. Once you have an estimate for your bedroom, you can move onto the other areas of your residence.

As you walk through each room, it is also a good idea to take a picture or video of all the belongings that you have in that room. This can be beneficial if you have to file a claim as it proves you owned that property and can help estimate what the property was worth.

The typical renters policy will offer you a default amount of personal property coverage between $20,000 and $30,000. After completing an inventory of your belongings, you may find this is enough coverage. However, if your inventory total exceeds that of the default option of a renters policy, you can increase your coverage.

2) Loss of use coverage - You can typically select to increase your loss of use coverage from the default amount, but most insurers only let you use the coverage for a set period of time. First, loss of use coverage can cover you for a specific number of months such as 12 or 24 months.  

Second, loss of use coverage can cover you until the property you were living in was repaired. Thirdly, loss of use coverage can cover you until you find a new permanent residence. Insurers will typically use the shortest available option of the three depending upon circumstances.

If you are not worried about damage occurring to the property you are living in the default amount on your specific renters policy can be enough coverage. But if you are worried about damage to the property, it can be a good idea to make sure you have enough loss of use coverage to protect you for at least 1 year or longer.

3) Liability coverage - Renters policies typically offer anywhere from $100,000 to $500,000 worth of coverage. If you have assets, you want to have enough liability coverage to protect them. If you injure someone or cause damage to their property and don't have sufficient liability coverage, they may be able to pursue legal action and come after your assets.

For example, lets say that you had $150,000 worth of stocks. It can be a good idea to increase your liability coverage to at least $150,000 if not more. If you do not have assets, you can typically get away with having the default amount of liability coverage.

4) Medical payments coverage - Renters policies typically offer anywhere form $1,000 to $5,000 worth of medical payments coverage. Medical payments is a nice coverage to have, but it is probably the least important on a renters policy. You can usually just stick with the minimum if you desire.

The average cost of renters insurance in the US is typically around $12 per month or $148 per year. This makes renters insurance one of the most affordable coverages to obtain. The following factors will impact how much you pay for coverage.

1) Coverage limits - The more coverage you add to your policy, the more you will pay. This relates to your personal property coverage. If you need $50,000 worth of coverage, you will pay more for a policy than someone else who only needs $25,000 worth of coverage.

2) Your deductible - Like other types of insurance policies, renters policies have a deductible. This is the amount of money you must pay to the insurance company before you can file a claim. A higher deductible will result in a lower premium, whereas a lower deductible will result in a higher premium.

If you want to save money on the monthly or yearly cost of your renters policy, it is best to opt for a higher deductible. If you are worried about having to use your policy and would rather save money on the back end, it is best to opt for a lower deductible.

3) Your location - Insurance companies are in the business of assessing and mitigating risk. If you live in an area that has high rates of crime (specifically theft) or is prone to fires, storms and hurricanes, you will likely pay a higher premium than you would if you lived in an area that does not have these issues.

4) Your other insurance policies - Almost all insurance carriers will offer bundling discounts in an effort to gain more business and retain customers. If you already have your car insurance with one insurer, see if that insurer also offers renters insurance. There is a good chance you would be able to get a bundling discount if you also bought renters insurance from that insurer.

5) Safety features - Your insurer might also offer discounted renters insurance if your residence has certain safety features that protect the property. This might include gated communities, security systems, smoke alarms, deadbolt locks, video cameras and sprinkler systems. Whether or not you get a discount for safety features will depend on the insurer.

1) Understand your coverage needs - Before you start shopping for a renters policy, it is a good idea to understand what coverage you need. Make sure to inventory your personal property to get an idea of how much personal property coverage you need. You can also consider what would be an appropriate amount of liability coverage given your financial circumstances.

2) Start shopping for quotes - Once you have an idea of what coverage you need, you can start shopping for quotes. If you already have your car insurance with a particular insurer, it is a good idea to get a renters quote from that carrier as you will get a bundling discount.

In addition to that quote, it is a good idea to get quotes from 3 or 4 other insurers. You can do this by calling individual insurers directly, getting quotes on their websites, or by using third party comparison sites.

3) Work with a licensed agent for the best quotes - After you have a couple of quotes you like, it is a good idea to reach out to a licensed agent in your area that represents that company. You want to work with an agent that will help you scrutinize the coverages on your policy to make sure you have sufficient coverage. This can be a pain, but it is well worth taking the time to understand your policy.

4) Sign up for your policy - Once you have a policy that you are confident in, you can fill out any necessary paperwork required by the insurer and submit your first payment. This payment will bind the contract and immediately provide you with coverage.

The bottom line is that renters insurance is designed to protect your personal property, and mitigate liability when you rent an apartment, condo or home. Renters insurance is among the most affordable types of insurance. It is not legally required by state or federal law, but is often a requirement by landlords.

If you decide to purchase a renters policy, make sure that you inventory your personal property and buy enough liability coverage to make sure you have substantial coverage to protect yourself and your property.