With the recent housing boom driving up home prices, a lot of people have continued to rent houses or apartments, rather than trying to find an affordable place to buy. While many do so out of necessity rather than desire, some apartment-dwellers and other renters consider it a prudent financial move. Renters don't have to worry about rising mortgage payments and real estate taxes, nor are they responsible for major upkeep and maintenance on their property. True, they don't benefit from any appreciation in the value of the property, but they won't suffer from falling prices, either.
There's another way in which renters may believe that they save money. Many renters think that because they don't own their homes, they don't need to deal with any sort of homeowners' insurance or other coverage. In many cases, however, that gut instinct is wrong. The provisions of homeowners' insurance go well beyond simply covering the building in which you live. It often makes sense for renters to take out insurance of their own.
The lowdown on renters' insurance
Homeowners' insurance isn't the best name to describe the type of coverage it usually provides, because it suggests that only people who own their homes need the insurance. In fact, homeowners' insurance coverage covers all sorts of things in addition to the actual dwelling. For instance, if someone comes over to visit you and gets injured in a way that you should have prevented, your homeowners' insurance provides liability coverage that will pay medical costs and other resulting damages. If your house is robbed, causing no damage to the premises but taking valuables that are worth a lot of money, property coverage in a homeowners' policy may reimburse you for most or all of the cost to replace the stolen goods. In some cases, homeowners' insurance covers you even when you're not at home, if there's damage to particular items of property that are covered under your policy.
Basically, renters' insurance is just homeowners' insurance without the coverage for the building. In almost every situation, your lease will specify that your landlord is responsible for providing insurance on the building, but you as the tenant must insure your own personal property. Depending on the laws of your state and the specific terms of your lease, your landlord may attempt to put in language that would prevent you from demanding compensation from your landlord in the event of a fire or other major loss. You might not be able to get money from your landlord, even if you can prove that the fire was your landlord's fault or was due to negligence. Having renters' insurance saves you from worrying about collecting from your landlord or another insurance company.
Does it really make sense for you?
Even though renters' insurance is useful when bad things happen, it's not necessarily a good bet for everyone. Many people who live in apartments are young adults without a huge amount of valuable material possessions. Clearly, if you don't have anything worth insuring, it doesn't make any sense to buy insurance.
Before you conclude that renters' insurance isn't worth it, take a close look at the things you own. If you had to replace every single thing you have, it might cost you a lot more than you'd initially guess. It's not unusual for even modest wardrobes to cost hundreds or thousands of dollars to replace, and while computers and other electronics continue to fall in price, it doesn't take much to put you well over a thousand dollars to replace them.
In addition, the liability coverage under your renters' insurance policy may not be limited to accidents occurring inside your apartment. While accidents typically covered by other types of insurance, such as an auto accident, won't fall under your renters' insurance coverage, your renters' policy will cover you for accidents resulting from a number of other things you may do, such as breaking a neighbor's window with a baseball. Again, the value of liability insurance depends on how much you have to protect; if you don't have any money, you're unlikely to get sued, even if you do something that's clearly your fault.
Renters' insurance is usually pretty affordable; just a couple hundred dollars per year is enough in many areas to get coverage for property worth between $20,000 and $30,000. Like other types of insurance, renters' policies typically have deductibles that limit your ability to make claims for losses below a certain amount. A usual deductible is $250 or $500, so the deductible amount can be quite small in comparison to the damages you suffer in a total loss. It's easy to find companies that offer renters' insurance, including big names like Nationwide
One of the nice things about renting instead of owning a home is that you don't have to worry about repairs or maintenance of the building where you live; if there's a problem, all you have to do is call your landlord to take care of it. When it comes to insurance protection from fire, theft, and natural disasters, however, you can't count on your landlord to make everything right. A solid renters' insurance policy can save you from permanently losing everything you own.
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When Fool contributor Dan Caplinger had his video camera, VCR, and stereo stolen from his apartment 10 years ago, he was covered. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy saves you from worry.
