How Does Renters Insurance Work?

You're in luck if you're curious about how renters insurance works. Renters insurance is not only one of the simplest types of insurance to obtain, but it is also relatively inexpensive. Renters insurance covers you in a wide range of situations, from coverage if your laptop is stolen from your car to medical payments for a friend who falls and injures themselves in your kitchen.

While renters insurance is generally straightforward, there are some fundamentals you should be aware of before shopping for premiums. And understanding what isn't covered by renters insurance is just as important as understanding what is.

Do I need renters insurance? 

Getting renters insurance makes good financial sense. Nonetheless, an alarming number of renters refuse to obtain one. It could be because there is uncertainty about the need for a policy. Renters frequently believe that their landlord's insurance covers property damage, but this is not the case. Landlord insurance only covers the physical structure of the property, whereas renters insurance covers all belongings inside the property as well as personal liability.

Many landlords need renters insurance, but even if they do not, the coverage is not prohibitively expensive. Your belongings are protected against damage from a wide range of events for an average annual cost of $180. A policy can help you replace your belongings and repair your property, not to mention the liability protection it provides.

If you have valuable items to protect, or if you have pets and visitors, a renters policy is a good investment for your financial security.

What does renters insurance cover? 

Renters insurance protects your personal property. However, the policy goes a step further by including personal liability and medical payments in the event that someone is injured inside your rental or as a result of an accident caused by you.

Additional living expense (ALE) or loss-of-use is another important coverage category. This coverage kicks in if you are forced to vacate your rental due to damage such as fire. It can help you get reimbursed if you have to live somewhere else and have to pay for hotel bills, temporary rentals, meals, and other living expenses.

Renters insurance covers several major categories, but there are a few additional areas where a policy provides greater protection.

  • Credit cards and forgery: Most policies cover you if your debit or credit card is stolen or you are the victim of fraud (including identity theft).
  • Food spoilage: If your refrigerator breaks down, the power goes out, or you are forced to leave your rental due to damage, your policy may reimburse you for the food you lost.
  • Replacement value: Replacement Value (RV) versus Actual Cost Value (ACV) is another option for renters insurance (ACV). When an item in your rental is damaged as a result of a covered event and must be replaced, the renters insurance claim payout will be either RV or ACV. If you choose RV, you will receive a higher payout, but your premiums will be higher.
  • Personal belongings stored elsewhere: If you have personal property stored elsewhere, it is still covered by property damage insurance. For example, if your mountain bike is damaged while being stored in a storage unit, it is usually covered.

What renters insurance doesn’t cover 

There are times when renters insurance will not cover you — and you don't want to be caught off guard assuming you're covered. The good news is that even if something is excluded, policy add-ons are usually available to make your policy more comprehensive.

  • Floods and earthquakes: Although most policies cover a wide range of natural disasters, floods, earthquakes, hurricanes, and sinkholes are typically excluded. If you live in an area where these excluded disasters occur, speak with your agent about incorporating the coverage into your policy.
  • Pest damage: Your policy does not cover damage caused by bedbugs, termites, rodents, or other creepy crawling insects in your rental. Some insurance companies, however, provide additional protection against bedbugs and other critters.
  • Your roommates: A rental insurance policy only covers the person whose name appears on the policy. Unless you sign a joint renters insurance policy, this frequently excludes roommates.
  • Your high-value items: Many items are considered high-value if they are worth a certain amount, usually $1,500 or more. You may require additional coverage if the item is excluded. This includes items like jewelry, antiques, equipment, and electronics.
  • Pet damage: Damage to your personal property or rental caused by your cats or dogs inside your rental is not covered. For example, if your pet chews through the walls of your rental, you are liable for the damage. However, if this same furbaby bites your neighbor, your policy will cover necessary medical treatment up to the policy limits.

What to look out for when shopping for renters insurance 

There are specific items you should look for, just like with other insurance products, to ensure you're getting the best policy for your financial situation. To begin, confirm the limits of your renters insurance payouts. Each category has a different payout limit, which is the most money that can be paid for a claim. Check that these limits are not too low or too high, and that they provide the appropriate amount of coverage.

The liability coverage should be sufficient to cover your net worth. Your net worth is the value of your assets (such as retirement accounts, savings, and free and clear cars) less the value of your debt. So, if you have a net worth of $300,000, your liability coverage should be at least that amount. The reason for this is to protect you in the event of a lawsuit resulting from an at-fault accident. If your net worth exceeds $300,000, the Insurance Information Institute suggests purchasing an additional liability policy.

Your property damage limit should be sufficient to cover the cost of replacing your belongings.

Comparison shopping is a good way to ensure that you get the coverage you require. Comparing renters insurance policies not only gets you the best deal on your policy, but your agent can also advise you on the most comprehensive coverage.