Renters Insurance: What It Is And How It Works

As a renter, you need renters insurance to protect your belongings. Renters insurance is affordable is often required by landlords.

A long time ago, I rented a one bedroom apartment in San Francisco for $1,800 a month. One day, it started to rain hard and unbeknownst to me, the ceiling started to leak right over my laptop the entire night! When I woke up, my laptop was ruined and I was out of luck.

If I had renters insurance, it would have covered my $2,500 computer. Lesson learned. I won't be making that mistake again and neither should you.

What Is Renters Insurance?

Renters insurance is also known as tenant insurance. A renters insurance policy protects you and your belongings whenever you are renting a house or apartment.

As a landlord now, I require all my tenants to get renters insurance. Leaks, thefts, flooding, and other bad things do happen. Otherwise, I'm going to move onto the next applicant. I'm simply too busy to have unnecessary liability hang over my head now that I'm a father of two young children.

I'm all about trying to earn as much passive income as possible, which is why I sold one rental property and reinvested $550,000 of the proceeds in real estate crowdfunding instead.

Renters insurance has three main parts:

  • Personal property coverage
  • Liability coverage
  • Additional living expenses coverage.

Personal property coverage protects your belongings if they are damaged, destroyed, or stolen. Personal property includes you expensive mattress, your clothes, your laptop, your flat screen 4K TV, your bicycle, and other personal items.

Liability coverage protects you if you accidentally damage someone else's property or someone gets hurt in your apartment. For example, if one of your friends gets hurt in your apartment during a house-warming party, goes to the hospital, and then decides to sue you your liability coverage should kick in for both medical and legal fees.

Additional living expenses coverage will pay for finding alternative living arrangements if your apartment is damaged or uninhabitable. For example, your apartment might have experienced a fire. This is when you would use your renters insurance to help you find temporary living arrangements elsewhere.

What Does Renters Insurance Not Cover?

Now that we know what renters insurance covers, let's look at what renters insurance does not cover.

1) Natural disasters

Flooding, sinkholes, and earthquakes are not covered under renters insurance. You'll have to buy a natural disaster-specific insurance policy if you want coverage. However, if a a volcanic eruption, wildfire, or tornado destroys your things, you’re most likely covered. Just make sure to double check with your policy provider.

2) Damage to your car

If someone steals stuff from inside your car, which happens all the time in my city of San Francisco, renters insurance has you covered. But, renters insurance doesn’t cover damage to your car itself. If you want vehicle damage coverage, then you need to get auto insurance.

3) Undocumented personal items

If you can’t prove you own your items or prove the value of them, you may be out of luck. When you file an insurance claim, you’re often asked to provide a receipt. Therefore, absolutely keep a record of all your personal items in a spreadsheet. Take as many pictures as you can of your stuff as well. Now record how much each of your items is worth.

4) Your housemate's things

Unfortunately, unless your housemate is on your policy, your housemate's stuff won't get covered if his or her things are stolen, lost or damaged. However, if your roommate happens to be related to you by blood, marriage, or adoption, their things will get covered.

5) Pet damage

Although I like pets, I often require a pet deposit before allowing a tenant to have a pet. Pets have consistently damaged my property in the past. Further, renters insurance doesn’t cover any damage done by these creatures. Therefore, as a renter, you must bake in the cost of losing your pet deposit and paying for damage.

6) Personal property damage

Renters insurance covers your stuff, but it doesn’t cover the physical building that holds your stuff. That’s what landlord insurance is for. One time, I had a bathroom leak down to the lower apartment. I used landlord insurance to help pay for damages.

What Is The Cost Of Renters Insurance?

The great thing about renters insurance is that it is relatively inexpensive. Whenever I look at my tenant's renters insurance policy, I'm surprised it's often only between $100 – $200 a year. The cost depends on the amount and value of your belongings.

My tenants who are paying $100 – $200 a year for insurance are paying over $50,000 a year in rent for a property that is worth more than $1,200,000. Given the average property in America costs closer to $250,000, the average cost of renters insurance is much lower.

Renters insurance is relatively cheap because it doesn't cover the structure of the property itself. As a result, landlord insurance for a property that costs $1,200,000 is closer to $1,000 a year. The cost of landlord insurance obviously depends on the value of the property, among other things.

Determining How Much Renters Insurance You Need

How much renters insurance you need depends on how much stuff you have and how valuable your stuff is. The more valuable and the more you care about your stuff, the more renters insurance you need.

To figure our more precisely how much you need, spend as long as it takes to photograph and video everything you have. Then document the cost and value of each item in a spreadsheet. Start with the most expensive items first and work your way down.

Whatever your total is, round up to the nearest $5,000 or $10,000. For example, if you have $18,000 worth of stuff, round up to $20,000 worth of renters insurance coverage.

Basic policies generally start at $10,000. You can add more coverage down the road if you get more valuable things.

Where To Get Renters Insurance

The easiest way to get renters insurance is through PolicyGenius. They are the #1 insurance marketplace that helps consumers find the best type of insurance policy in one place.

On PolicyGenius you can compare each offer from qualified insurance companies instead of having to apply to each carrier one-by-one. You'll also find some of the best renters insurance rates.

I've met both the founders multiple times and they have built a truly helpful site that allows renters to get the best renters insurance policy around.

About the Author: Sam worked in investment banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.