It’s increasingly common for landlords to require tenants to carry renters insurance coverage. That’s understandable, as renters insurance limits landlords’ liability for potentially costly mishaps, like a building visitor landing in the hospital after sustaining an injury on the premises. It may absolve them of any financial responsibility for tenant possessions damaged or lost to fire, water leaks, vandalism, and certain other events covered by the policy.
Even when it’s not mandatory, renters insurance has direct benefits for tenants. But it isn’t free. A starter policy with high deductibles and relatively low coverage limits costs in the neighborhood of $150 to $200 per year. Higher-end coverage costs $300 to $500 or more per year, according to Insurance.com. For frugal, careful renters whose landlords don’t demand coverage, that cost might be too much to bear.
Before rushing to purchase a policy you might not need or writing off renters insurance as unnecessary, take a few minutes to consider the benefits and drawbacks.
Pros of Renters Insurance
Renters insurance has some clear advantages, including possible protection from liability, discounts for bundling it with other types of insurance policies, and limited protection from negligent landlords.
1. It’s Not Limited to the Possessions in Your Apartment
When you hear the term “renters insurance,” you probably envision a policy that reimburses you for personal belongings that are lost, damaged, destroyed, or stolen within the confines of your apartment.
This is a key function of renters insurance, but it’s not all it entails. Renters insurance has three distinct components:
- Content Coverage. Virtually all renters who carry insurance hold a content insurance policy (also known as personal property coverage) that covers TVs, stereos, computers, furniture, and other valuable items that stay in the rental unit. Content insurance also covers items you keep in your car, provided the vehicle is registered in your name and at your address. If your car is burglarized overnight or while you’re out of town, your policy may reimburse you for the theft of any covered items within it.
- Liability Coverage. Renters insurance also protects you from liability issues that may arise in the course of your tenancy. If a guest sustains an injury during a fall or as a result of an accident at your home, your renters insurance policy’s liability coverage may cover the cost of a potential lawsuit, associated legal fees, and/or the guest’s medical bills. Likewise, your policy may cover the cost of fire or water damage sustained by other tenants in your building due to faulty plumbing, outdated wiring, leaky floorboards, and other hazards that originate in your unit.
- Loss of Use Coverage. Finally, your policy should cover (or at least provide you with the option to cover) temporary relocation and living expenses you may incur if your apartment becomes unlivable due to fire, flood, or structural damage. This is known as “loss of use” coverage.
Comprehensive renters insurance policies typically include all of these components, while lower-cost policies may exclude relocation coverage.
2. You Can Save by Bundling It With Other Insurance Policies
Your apartment likely isn’t the only thing you’d like to protect. For example, if you own a car, you’re legally obligated to carry auto insurance on it. These days, you’re also required to hold a health insurance policy. Depending on your age and family situation, you may have life insurance as well. And if you own particularly valuable items, like precious jewelry or original artwork, you may need customized policies to cover them.
The good news is that a renters insurance policy can be (and often is) bundled with other insurance types at a significant discount. Virtually every major insurer offers a multipolicy discount, or a premium discount for carrying more than one insurance policy with the same company. Since many renters also own cars, bundling rental and car insurance policies is common.
The discounts can be impressive. For instance, Liberty Mutual claims applicants can save upward of $800 when they bundle home and auto insurance policies. Other insurers offer similar discounts on a case-by-case basis.
3. It Protects You From Landlord Negligence
Imagine this: You head home from work, looking forward to a relaxing evening of eating takeout and binge-watching Netflix. But as you approach your apartment building, you realize something isn’t right. Fire trucks and cop cars surround the entrance, and a thin cloud of smoke rises from the roof.
Eventually, investigators determine that a decades-old circuit shorted out, triggering a chain reaction along some old faulty wiring that caused a fire on your floor. The building isn’t destroyed, but your apartment has been ruined by smoke and heat. Your electronics are useless, and your furniture is irreparably damaged.
Time to put your life on hold? Not if you have renters insurance. Even though this incident is clearly the fault of your landlord, you’d be on the hook for the cost of replacing your damaged possessions without sufficient renters insurance coverage. Your landlord’s insurance covers the unit’s structural components and appliances — and furniture if the place came furnished — but it doesn’t extend to anything you own.
Cons of Renters Insurance
Renters insurance has some notable drawbacks, including higher costs to cover valuable items and significant restrictions on coverage without purchasing add-ons (riders) at an additional expense.
1. Collections or Specific Valuables May Require Additional Coverage
Renters insurance covers the cost of replacing everyday personal property and equipment, but it always comes with a coverage limit. This limit may be as low as $5,000 or as high as $500,000, and it generally doesn’t cover novel or valuable possessions.
For example, if you store multiple pieces of jewelry in your apartment, your renters policy might not cover them (even a regular old engagement ring might not fit the bill). If you have extensive collections of records, stereo equipment, shoes, artwork, or even rare books, you might also be out of luck.
You can still cover these items, but it will cost you. You’ll need to purchase a rider — a supplementary policy covering specific items — or a separate, specialized property insurance policy for high-value items like jewelry. For instance, Allstate offers a scheduled personal property insurance rider that allows you to exceed its standard per-item coverage limit of $1,500 for specific named items with higher intrinsic or replacement value.
2. There Are Coverage Limits and Exclusions
If you’ve ever been in a car accident that wasn’t covered by your auto insurance policy, you know that simply carrying insurance doesn’t necessarily free you from financial or personal liability. Depending on your deductible size, you must make some out-of-pocket payments before your coverage kicks in.
Before you take out your renters insurance policy — and for as long as you keep it — you need to expend some effort to maximize the chance it will deliver when the time comes.
First, take a careful look at your coverage limits and exclusions. According to State Farm Insurance, the average renter owns personal property (property not covered by their landlord’s insurance policy) worth about $35,000. If you’re “average” in this regard, you’ll need at least this much coverage to insulate you against a total loss. It might also be a good idea to take on additional coverage if you anticipate making big purchases in the near future.
It’s crucial to mind coverage limits on specific product categories as well. You shouldn’t expect standard rental insurance policies to cover high-value items, such as $5,000 rings and $10,000 stereo systems. The cost of riders or scheduled property protection can add up quickly. To minimize the cost of a rider or supplemental policy, purchase it at the same time — and through the same insurer — as your main renters insurance policy to qualify for bundling discounts.
It’s also critical to understand what renters insurance doesn’t cover. Like homeowners insurance, rental insurance is stingy about paying for flood damage and sewer problems. If you live in an area that’s prone to flooding, ask your insurer whether you’d be covered in the event of a flood. If you won’t, look into supplemental flood insurance policies, which may be subsidized by state or federal programs.
For example, if you occupy a ground-floor or basement apartment that’s prone to flooding or damage from sewer backups, your renters policy may not cover associated cleanup costs. Your insurer should offer supplemental “sewer and drain” coverage. Ultimately, however, you’re reimbursed for a specific insurance claim may turn on events that aren’t wholly within your control.
3. “Replacement Value” Coverage Can Be Costly
When you take out your renters insurance policy, you must choose between a “replacement value” policy and an “actual cash value” policy. In the event of an accepted claim, a replacement value policy reimburses you for each lost or destroyed item’s value at the time of purchase (so be sure to save your receipts). An actual cash value policy, meanwhile, reimburses you for each item’s depreciated value.
Depreciation calculations are complex and difficult to generalize. But as a rule of thumb, electronics such as computers and TVs tend to lose most of their value within three to five years. More durable items like couches, tables, and jewelry may retain their value for longer.
4. Credit Issues Could Increase Your Insurance Costs
One of the lesser-known consequences of a bad credit score is the potential for higher rates for auto and property insurance. Renters who have solid credit scores (about 660 to 680 and up) generally pay less for comparable policies than those with suboptimal scores.
This can be a problem for renters required to carry property insurance or who seek the peace of mind that comes with coverage. Of course, you’re free to reapply for coverage as your credit score improves, but in the meantime, you’re stuck paying more.
5. Potential Caps on Reimbursements for Temporary Living Expenses
Many insurance companies place a dollar cap or time limit on reimbursements for temporary living expenses. Suppose it takes four months after a fire to restore your apartment to a livable condition, and your renters insurance policy only covers relocation expenses for two months. In that case, you’ll need to pay out of pocket for the other two months of living expenses.
In other words, it’s probably best to assume your renters insurance policy won’t cover every single expense that arises out of an unfortunate circumstance. Having a healthy emergency fund saved up is one way to keep unexpected costs like this from derailing your finances.
Choosing to purchase or forgo renters insurance is not a decision to make lightly. Nor is it a decision to agonize over and blow out of all proportion. If your renters insurance cost-benefit analysis has you at an impasse, consider this: You stand to save far more each year by moving to a more affordable city for renters than by doing without renters insurance.
In the grand scheme of things, peace of mind is relatively inexpensive.