Renter’s Insurance: Scam or Reward?

An oft-pondered, though seldom-considered device that may or may not be a good idea: renters insurance is certainly a phenomenon that once pronounced itself in your presence. Too often, it is seen as applicable to all or none, with no middle ground. “Renters insurance is a good idea”…or “Renters insurance is a scam”; Did you hear any? Thought so. Oh how generalities plague market demand. Anyway, I’ll take one unusual approach, which shows how to determine if renters insurance is a good or bad idea for YOU…specifically.

A brief description: What is it?

Renters insurance exists to protect the belongings of residents who do not own the homes in which they reside. In addition, it shifts financial risks away from liability to the insurance company, which means that if an accident occurs at your rental property for which you are legally responsible, the insurer (the company) will incur the financial damage. Examples here include but are not limited to someone tripping on your rug and breaking their arm, leaving a bathtub running and destroying people’s property in an apartment below you, or even shooting fireworks indoors and burning your entire building, even all of your neighbors’ (anyone?) possessions.

Getting back to personal property loss – here are the 17 types of perils that result in the loss of your property that will be covered by renters insurance:

• Electrical surge damage
• Ice, snow and sleet damage
• Water damage from utilities
• fire and lightning
• falling objects
• volcanic eruption
• Resulting loss of glass or any glazing material considered to be part of the building
• Theft
• Smoke
• Vandalism and mischief
• rampage
• hail and wind
• Aircraft
• Burst
• vehicles

Nationally, the most considered property loss prospects for renters are Burglary and Fire. Depending on your area and the location of your home, flooding can also be a problem; however, flood insurance is not included in a standard policy, requiring a rider to be included. Regardless, for our purposes today, we will focus on theft, fire, and liability. There are two types of policies: actual cash value coverage and replacement cost coverage. The first (ACV coverage) covers only the depreciated value of your items, not the actual cost of replacing your items; For this, RC coverage is required. We’ll get into recommendations between the two in a moment.

Here’s the rough calculation process we suggest to help you decide if renters insurance is a worthwhile purchase. Keep in mind that most insurance policies have annual costs between $150 and $300 with some type of deductible.

Step 1.) Analyze your liability risk for damages

• Those who live on the second or higher floors are more likely to be liable for damage to neighbors’ property, considering that people are directly below. Waterbeds can ruin your life; if it does go off, be prepared to cover the damage from those living below you.
• You have a dog? If so, renters insurance will provide protection in case the animal releases its testosterone on its neighbors or visitors. Be especially careful if there are small children living nearby.
• Those with frequent visitors are more likely to have a non-resident sustain some type of injury at the residence in question. Be careful… you never know when a friend will get into a dispute with you.

If you think your home is high risk, that’s an automatic trigger to start looking for insurance. If not, dig deeper and let’s discuss your property’s value and potential loss.

Step 2.) Assess the value of your total possessions, separate out “stealable” possessions

• ““Stealable” possessions are items that can and are available to be stolen in the event of theft: televisions, DVD players, computers, jewelry, or even cash that is normally kept on hand, among other things. This is to assess the potential damage should you be the victim of theft, as it is unusual for all possessions to be lost.
• Total Possessions: Include everything here, from your shoes to your hair dryer. The estimates are exactly as stated, estimates. Just imagine losing it all and consider the costs of getting it all back. This is necessary to assess your loss in the event of a catastrophe such as a fire where all is lost.

Step 3.) Calculate your risk of loss

• There are 105 million homes in the US, and there are about 350,000 fires for which a Fire Department can handle. It is necessary to stop the flames, so based on history, there is almost a 3% chance of a catastrophic fire in your home. While not all of these fires will destroy everything, it’s worth keeping your total destruction chances at 3% as it helps to accommodate for obscure risks like falling objects or vehicle damage.
• For burglaries, check out Neighborhoodscout to look up crime rates in your state and even your specific area. Let’s use the state of Georgia as an example where there are 46 robberies per 1,000 people per year (4.6%).

Step 4.) put it all together

–Now I know that my risk of total loss is about 3% and my risk of theft is 4.6%. If my total possessions are worth $25,000 and I calculated my “stealable” things to be worth $5,000, here’s how to calculate the annual risk of loss for me.

(.003 * $15,000) + (.046 + $5,000) = $275

– Essentially, this takes 3% of your $15,000 in total items and adds it to 4.6% of your $5,000 “stealable” items… add them up and you get the risk you need to cover to cover potential property losses. it pays off for you on an annual basis. Also, if your home is, by your estimation, considered “risky” in terms of liability, then an insurance company quote of $275 a year isn’t too bad.

Next, let’s be clear about who should definitely look into renters insurance:

• Families with children (essential)
• Those running businesses from home: Everything you worked for could be lost.
• dog owners
• And, my favorites, the ones with waterbeds on the second (or higher) floor

Keep in mind that even if you live at a friend’s house, a negligent act on your behalf that results in the loss of a roommate’s property leaves your checkbook on the hook. To back up a bit, when deciding between ACV (actual cash value) coverage and CR (replacement cost), you really need to consider how much it would cost to replace your items. ACV will simply take the depreciated value of your items and give you what you are worth. However, it may actually cost you more to replace such items as you will have trouble finding similar items for the money you received. If your stuff is getting old, get replacement cost coverage (a little more expensive, but worth it). If your stuff is relatively new, you can probably slip in with the least expensive ACV coverage, since your stuff hasn’t had a lot of time to depreciate.

Finally, it’s important to know exactly why you’re buying renters insurance and what items you’re actually protecting. This way you will really understand whether or not it is worth your time and money to sign up. Monthly costs can be lowered by raising your deductible or simply by taking precautionary measures to avoid catastrophes (fire extinguishers, deadbolts, etc.). If you’ve got a few extra dollars to spare, and Mr. Insurance Broker’s quote seems like a good deal, go for it, but if it just doesn’t add up… you shouldn’t be ashamed to turn the other cheek to insurance. It’s your world, protect it as you see fit. Bada bing, bada BOOM…. Salloum. Until next time.