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Should I Buy Renters Insurance?

More people than ever are renting, which means more people than ever are curious about renters insurance – or at least they should be.

One of us currently rents, and the other is a former renter. For new graduates fresh out of college, renting provides the flexibility to relocate and adapt to the changing circumstances that come with establishing a career and, potentially, a family. Renting also keeps young professionals free from the burdensome costs that accompany homeownership, such as a down payment on a mortgage loan or annual real estate taxes.

It is not only young adults driving the renting boom, however. Renting allows retirees to downsize, move closer to family, reduce living costs, or shift responsibilities like maintenance and repairs to a landlord. Whatever people’s motivations, there are more renters in the U.S. today than at any time since 1965, according to a 2017 report by the Pew Research Center, accounting for nearly 37 percent of American heads of household.

Yet a 2016 Insurance Information Institute poll conducted by ORC International found that while 95 percent of homeowners report having homeowners insurance, only 41 percent of renters say they have comparable coverage. This disparity is notable but probably unsurprising given that many people remain confused about renters insurance policies and their cost and coverage.

Some landlords require tenants to carry a renters insurance policy as a provision in their lease; however, no U.S. state requires the coverage by law. Renters insurance remains purely optional for many renters – an option that most of them, unfortunately, overlook.

One common misconception that leads many renters to ignore renters insurance is the assumption that the landlord’s insurance coverage on the building will extend to the tenants’ personal belongings. This is not the case. A landlord’s property insurance only covers structural damage to the building as a result of fire or inclement weather, not the tenants’ personal property.

Another misconception, especially for new graduates just beginning their careers and often facing high student loan payments, is that renters insurance policies are expensive. In reality, most basic policies are quite affordable, running about $120 annually. Even optional additional coverage seldom raises the cost above $200 for the year. Renters living in buildings with certain features, such as onsite security or sprinkler systems, can reduce policy costs. Opportunities to bundle renters insurance with other policies, such as car insurance, can further reduce the price – in some instances by as much as 10 percent.

Renters insurance is affordable for most people, but as with any insurance product, it is important to understand what it actually covers. Many people think of it first and foremost as a way to protect their personal belongings from damage or theft. Renters insurance does meet this need, but it also protects renters against liability. If a visitor sustains a serious injury in the apartment and that injury is found to be the host’s fault, rather than, say, the landlord’s, the visitor can file a claim and the insurer may partially cover the costs of their medical care. If that visitor sues their host, renters insurance may also cover part or all of the cost of the host’s legal defense.

All of this coverage is subject to limitations. A typical policy will cover $20,000 to $30,000 worth of personal property. Additionally, most will provide at least $100,000 of protection against liability claims or lawsuits. This includes injuries caused by anything that occurs in the apartment, including injuries caused by the renter’s children. With regard to hospital bills, even the cheapest plans typically offer coverage of no less than $1,000.

As with homeowners, different renters will need different amounts of coverage. After accounting for personal items including electronic equipment, clothes, tools and kitchen gadgets, renters may end up surprised at how the value of their personal property adds up. Industry estimates suggest that the average person’s belongings are worth about $20,000, though obviously this figure can vary widely. Renters should make a detailed inventory of their personal possessions, creating itemized lists that include purchase prices and replacement costs.

Most standard policies determine payouts on an “actual cash value” basis, often abbreviated ACV. This means that the insurance company will pay out based on the current value of an item, factoring in depreciation. If a renter bought a laptop five years ago for $2,000 and it is stolen today, the insurer will pay out significantly less than the purchase price based on ACV. Most companies also provide the option to purchase replacement cost coverage, which pays out what it costs to replace the item. In the example above, the policyholder would receive the full $2,000 for a new laptop, regardless of when it was purchased. Since these policies typically pay out higher amounts for claims, their premiums will be higher.

Picking between a high deductible and a low deductible plan is another important consideration. A deductible is a specified amount of money that the policyholder must pay before the insurance company will pay a claim. The higher the deductible, the more a policyholder must pay out-of-pocket before coverage kicks in. The trade-off is that higher deductible plans come with lower monthly premiums. A low deductible plan will not require you to fork over as much in the event of a claim, but you will pay higher monthly premiums for that privilege.

A renters insurance policy obviously covers personal belongings inside a home, but many people forget that coverage often extends to those possessions while they are physically outside of the residence, too. If property is stolen out of the renter’s car, for instance, the policy still covers it.

Almost all policies will cover displacement costs if the policyholder’s living situation becomes uninhabitable, though usually only for a limited period of time and up to a maximum cost. Renters should read their policy documents carefully in order to understand what counts as “uninhabitable,” since there is no strict legal definition. A missing window, a leaking ceiling, a broken air conditioner or a persistent bad smell may qualify; ugly wallpaper or worn carpet will not. Nearly all policies offer coverage if your apartment is uninhabitable because of a fire or storm damage.

Since many young adults in or just out of college have little to no credit history, they often need to ask someone to co-sign a lease when renting. In most instances, the co-signer is a parent or guardian. Under the lease’s legal terms, the co-signer and the person who is signing the lease are equally responsible; with no renters insurance, the co-signer will also be on the hook for any liability claims. Especially in an environment like that of a college campus or town, this makes renters insurance all the more important. (Note, however, that most of these concerns do not extend to guarantors.)

Many renters live with non-family members, such as romantic partners or roommates. Most insurers allow roommates to share a policy, but it is not a given that doing so will save money, and it can create complications. For partners who plan to marry in the future, one partner filing a claim that ends up on both people’s insurance record may not be a major concern; for friends who plan to go separate ways after a year or two, it may matter more. For renters who choose to share, it is wise to make sure each tenant is listed on the policy, since insurers may ask who owned what property when processing a claim.

Standard renters policies do not cover everything. Depending on an individual’s needs, it may make sense to consider purchasing additional coverage or a policy rider. Many renters fail to take advantage of the many unique combinations of coverage plans and riders they can bundle.

Expensive items - such as jewelry, antiques, collectibles or premium electronics – are typically covered under a renters insurance policy, but only up to a certain dollar amount. For example, $1,500 of coverage is standard for all jewelry; in order to assure coverage for a $3,000 necklace, a renter may need to purchase an additional rider. Similar considerations apply for a prized baseball card collection, high-end musical instruments, or any other especially valuable or hard-to-replace items.

A rider is an optional coverage add-on to the primary policy, which creates additional coverage opportunities without the need to purchase an entirely separate policy. Riders may serve specific purposes in addition to covering valuables. In most cases, renters with an existing ACV policy can add replacement cost coverage with a rider, though certain property specified within the original policy may only qualify for payout under actual cash value. Most insurance companies offer incidental business liability protection or home business endorsement riders for individuals who work out of their homes. These will protect business-related property beyond the policy’s baseline limits. Some policies even have the option to add riders for pets. This is because certain policies may not cover liability related to particular dog breeds, such as German shepherds or rottweilers. A rider can provide liability coverage for owners in the event their pet bites a guest in their home.

In addition to riders, renters may want to consider additional policies, especially if they live in an area prone to natural disasters such as floods, earthquakes or hurricanes, which are not covered by a standard policy. Gaps in your insurance coverage could lead to substantial financial damages, which is important to consider if you live near a fault line or in a flood plain. For the particularly worry-prone, note that most policies will pay out in the event of a volcanic eruption.

All in all, there is no “one size fits all” answer when it comes to renters insurance. What policy limits to get, whether to attach optional riders, or whether to purchase additional policies are decisions whose best answers vary from person to person. But nearly all renters should have some form of renters insurance. Many people can sufficiently protect themselves and their property for a year for less than the price of a fancy steak dinner in New York City.

Renters will be happy they made the choice to purchase insurance when someone breaks into their car. Or when their apartment is burglarized. Or when the volcano down the street erupts. Renters who experience the real and constant threat of all three, though, have another good option: Just move elsewhere.