A guide to understanding renters insurance

If you rent your home, much of the responsibility of maintaining the dwelling falls to your landlord, including insurance for the structure itself. But a landlord’s insurance doesn’t extend to a renter’s personal belongings. If disaster struck your home — such as a fire or storm — the landlord’s insurance would pay for building repairs, but if you want coverage for your possessions, you’ll need renters insurance.

It also makes sense to have insurance that will protect your possessions in the event of theft or vandalism.

Why renters insurance is a wise investment

The average annual renters insurance premium in the U.S. is only $188, or a little more than $15 a month, according to the Insurance Information Institute. Because renters insurance is usually cheap, it’s a smart investment. Think of the possible alternative, which would be paying out of pocket to replace everything that could be damaged: your jewelry, flat-screen TV, computer, furniture, clothing and so on. And a landlord’s insurance policy won’t pay for your living expenses while the building is under repair, either. Renters insurance does.

Yet only 40% of renters said they carry insurance, according to a 2015 Insurance Information Institute study.

Here are the important things to know before buying a renters insurance policy.

What renters insurance covers

Standard renters insurance, known as an HO-4 policy, reimburses you for the loss or destruction of personal belongings from 16 specific events. They include:

• Fire or lightning
  • Windstorm or hail
  • Explosion
  • Riot or civil commotion
  • Damage caused by aircraft
  • Damage caused by vehicles
  • Smoke
  • Vandalism or malicious mischief
  • Theft
  • Volcanic eruption
  • A falling object
  • The weight of ice, snow or sleet
  • Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or automatic fire-protective sprinkler system, or from a household appliance
  • Sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot water heating system, an air conditioning system or an automatic fire-protective system
  • Freezing of a plumbing, heating, air conditioning or automatic fire-protective system, of a household appliance
  • Sudden and accidental damage from artificially generated electric current (does not include loss to a tube, transistor, or similar electronic component)

What renters insurance doesn’t cover

Renters insurance won’t pay for damage from earthquakes or floods, meaning you’ll have to pay for repairs if you incur losses for one of these reasons. Flood insurance is available under a separate policy from the National Flood Insurance Program and possibly directly from your renters insurance company as well. Earthquake coverage also can be bought separately or as an endorsement or rider to your renters policy.  

Other valuable protections

Many people think of renters insurance as covering personal possessions only. But standard renters insurance also includes other protections that can be valuable to you. They include:

Liability insurance: If someone is injured in your home due to your negligence and sues you, a lawsuit could wreck your finances for years. The liability portion of your renters insurance policy covers you in these events, protecting you against lawsuits for bodily injury or property damage. It also covers damage you and your family accidentally do to others. An umbrella liability policy, which costs extra, will also cover you for libel and slander. An umbrella kicks in when you reach your liability coverage limit.

Liability also typically covers you if your dog bites a visitor, a neighbor or stranger, either on or off the property. Some insurers exclude dog bites from renters policies, however, so if you own a dog, check with your agent to be sure you’re covered.

A renters insurance policy generally covers both the cost of legal representation in a lawsuit and any damages awarded to the other party. Liability limits typically start at $100,000 and top out at $500,000; some experts recommend a minimum of $300,000.

Liability protection also typically includes no-fault medical payments coverage. Per the Insurance Information Institute, this “allows someone who gets injured on your property to simply submit his or her medical bills directly to your insurance company so the bills can be paid without resorting to a lawsuit.”

Additional living expenses: If your home is destroyed in a disaster covered by your policy, renters insurance pays for your additional living expenses. These include hotel bills, restaurant meals and other costs as your home is repaired.

How reimbursement works

Insurance companies typically offer a choice of two types of reimbursement for renters insurance policies:

• “Replacement cost” policies pay for the actual cost of replacing your possessions. For example, if your TV is a loss, the reimbursement amount would be for a new, similar TV.
• “Actual cash value” policies pay to replace your belongings at their value at the time of the loss. That means you get an amount that’s based on depreciation. For example, if you had a TV that was 2 years old, you’d get an amount that would let you buy a 2-year-old TV. If you want a new TV, you’ll pay the difference yourself.

Coverage for replacement cost is more expensive — usually about 10% more than actual cash value coverage, according to the Insurance Information Institute. But if you think you’ll want brand-new items to replace the ones lost should a disaster occur, you should spend the extra money for replacement cost coverage.

Certain valuable items may need special insurance attention, though, with what's called a rider. For example, a renters insurance policy typically caps the amount it pays for jewelry theft at $1,500. Items like watches, furs, silverware and firearms have low caps for theft coverage. So if you have a treasured diamond ring handed down from your grandmother, it's best to ask your agent whether you'll need a rider to cover its full value.

Who needs renters insurance

Some landlords will require you to have renters insurance before you sign a lease, or to buy it within a certain time period. Usually, though, it’s your call.

If renters insurance is optional, ask yourself whether you could afford to replace all your possessions if they were lost, damaged or destroyed. If the answer is no, renters insurance is a smart buy.

If your worldly possessions amount to a futon, a coffee maker and a toothbrush, you probably don't need renters insurance.

Discounts and other ways to save

Most insurance companies offer discounts if you have both your renters and auto insurance policy with them (called bundling), or if your apartment has a security system, smoke detectors or deadbolt locks.

If you’re looking for more ways to save money, consider raising your deductible. That’s the amount that will be deducted from your insurance claim check for a property loss. For example, if you have a $1,000 deductible and a claim for $5,000 in property damage, your insurance check will be for $4,000. The higher your deductible, the cheaper your rates. Keep in mind that you’ll pay the deductible each time you file a property-loss claim.

When deciding on a deductible amount, ask yourself: How much can you pay out of pocket in the event of a disaster?

There is no deductible on liability claims against you.

Know what you own

It’s important to take stock of what your belongings are worth because the answer will help you decide how much coverage you need. Your insurance agent can help you pinpoint the right amount of coverage, too.

Making an inventory before a problem occurs is essential to getting the claim money you’re entitled to. Note down each item you own along with its value and identifying information, like a serial number. Include everything you own on your list — even kitchen utensils, appliances, towels and bedding.

Free software available at KnowYourStuff.org can help you inventory your possessions. Most insurance companies also have such online tools.

Shop around

Though the average renters insurance premium is a good value at $188 annually, prices vary from state to state. Here are the states with the most and least expensive average renters insurance rates:

Most expensive:

• Mississippi, $250
• Texas, $247
• Louisiana, $246

Least expensive:

• North Dakota, $113
• South Dakota, $120
• Wisconsin, $130

Finding the best renters insurance means shopping around for the right coverage at a good price.

Juan Castillo is a staff writer at NerdWallet, a personal finance website. Email: jcastillo@nerdwallet.com. Twitter: @JCastilloNerd. This article first appeared in NerdWallet.