Maybe you’re a renter and just purchased your first home. Maybe you’re a homeowner and you’re downsizing to an apartment or renting. In either scenario, the process of finding a new home can be an exhausting, long, and consuming process. You probably don’t want to add something else to your checklist, but if you’re making either of those changes, a key component is insuring your home, whether it’s rented or not.
People tend to think one of two things — that renters insurance is a lot like homeowners insurance, or that renters insurance serves no other purpose than to replace personal property (clothes, furniture, electronics, etc.) if there’s some kind of loss. Those are both true to some degree, as they do share similarities and differences. However, the differences are significant, and not understanding them will negate any knowledge of similarities between the two. If you’re making one of these moves, you’re not just moving to a new home — you’re moving to a new type of property insurance policy too. Although both are largely founded upon liability coverage and personal property coverage, you need to do your homework and understand the most important differences between renters insurance and homeowners insurance.
#1 Coverage for the Structure
One of the main differences between the two types of policies is that homeowner’s insurance covers the house you live in as well as any other building structures on your property. Of course this comes with limitations related to coverage amounts, valid claims, and exclusions. If you live in a rental unit though, your rental insurance doesn’t cover the building, as your landlord has insurance on the actual property. If a small fire breaks out due to an electrical short, your landlord’s insurance will cover the damage to the building simply because the fire wasn’t your fault. On the other hand, if you’re the heating element in the rental property and a fire that’s your fault — intentionally or not — damages your unit, the liability portion of your rental insurance will help cover repair costs.
Because renter’s insurance doesn’t have as much cost attached to the claims made, a signature difference between this and homeowner’s insurance is the cost. Renter’s insurance is very affordable, and can cost as little as $20 per month. Homeowner’s insurance is much more expensive, but understandably so since you’re insuring an entire house. Generally, houses are larger than most apartments and townhouses, which also means homeowners often have larger amounts of personal belongings. Additionally, homeowners tend to have more valuable personal property too, investing in higher value items like furniture that they plan on keeping for years. If you take a catastrophic homeowner claim and compare it to a catastrophic rental claim, chances are the insurance company will have to pay much more to the homeowner — the exact reason why homeowners insurance premiums are so much more expensive.
#3 Personal Property Insurance
Don’t assume your landlord’s insurance will cover your belongings. This is one of the primary reasons renters seek out insurance. While it doesn’t cover any structural units, it provides protection for personal belongings. Whether they’re stolen or damaged in an accident, renter’s insurance can help replace the damaged items.
One thing renters and homeowners both need to keep in mind when purchasing insurance is the value at which they insure their structure and/or personal belongings. This is where the policies begin to become more similar. You have two options when insuring your belongings to their value: actual cash value or replacement value. Replacement value is the more expensive option, but it insures your house and belongings at the same price it would cost to replace them. This takes inflation into account, and on the structural side, covers entire rebuilding costs for homes. If your house was built in the 1970s, it would be prohibitively more expensive to reconstruct it today, but if it’s insured at replacement cost, you have much more protection.
Actual cash value is a more budget-friendly option, but you need to understand the risk you assume by choosing this method. If you’re a renter insuring your personal belongings at actual cash value, and then experience a devastating fire, the total sum of your belongings’ worth at the time of the incident is the benefit you’d receive. Why is this incredibly important? Consider the costs of everything now, from electronics to kitchen items. You may have furnished your entire apartment with Goodwill findings, but the $300 dollars you receive from the insurance company isn’t going to help you start from scratch and replace every single thing in your home.
Imagine turning your home upside down — everything that would fall out is your personal property. Now imagine what it would be like to have to replace everything, from your toothbrush to your lucky pair of socks. According to a 2012 Allstate study, even the average renter owns $30K of personal property, and respondents estimated that it would take about three years to replace everything they owned in the event of a total loss. Imagine what it would be like to replace everything in a two-story home, where years of personal property have accumulated. In both situations, obtaining adequate personal property coverage is imperative. Unless you’re a hoarder (can’t wait to see you on A&E!), the amount of personal property is relevant to the size of a home, meaning both need adequate personal property coverage as badly as the other.
Another similarity between homeowner’s insurance and renter’s insurance, or at least the people who purchase it, is the tendency to overlook policy exclusions. Most policies will cover a wide range of damages, injuries, and liability issues, but there will always be important exclusions on any kind of insurance policy. The problem isn’t so much the exclusions though as it is that these large exclusions are often written in the ultimate fine print. People typically don’t like to read insurance policies even if they were printed with oversize lettering, so it’s not surprising that exclusions in fine print aren’t often known about.
Unfortunately, most people don’t know what’s excluded on their property policy until it’s too late. Two of the biggest, most destructive exclusions are earthquakes and floods. To protect yourself from both of these disasters, it’s essential to purchase separate flood insurance policies and add earthquake endorsements to your policy. Flood insurance is only available through the National Flood Insurance Program (NFIP), and granted, if you live in Indiana you may not need to be as worried about earthquakes as someone in California does (unless you’re a doomsday prepper and subscribe to the visions of Nostradamus), but floods happen often and you don’t have to be near water to be affected by one. Don’t count on man-made structures of any kind when it comes to flood — too many unfortunate property policy owners made this mistake during Hurricane Katrina.
#5 Different from Condo Insurance
Another important policy worth mentioning is condominium insurance, which differs from homeowner’s and rental insurance policies. This is a special kind of property insurance because although you own a certain piece of a building, you’re not responsible for the entire thing. Many of these properties are managed by homeowner associations (HOAs) and have specific rules on insurance coverage. Whether it’s your permanent home or just a vacation spot, ensure you’re meeting not only HOA limits, but personal coverage needs too. If you aren’t sure what kind of policy to purchase, get a copy of your lease and make a visit to your insurance agent.
#6 The Number of People Carrying Coverage
One of the biggest differences between homeowners insurance and renters insurance? The number of policyholders. One would think that a renter would want all of their belongings replaced as badly as a homeowner, yet it wouldn’t appear this way if the number of renters insurance policyholders were compared to homeowners with insurance. According to Allstate’s survey, only 45% of renters carry renters insurance. In most states, home or condo insurance is required when you purchase the property, but rental insurance isn’t always required to sign a lease, although many landlords are starting to require this. They can ask you to do this by law, but similarly to the way homeowners shouldn’t need mortgage companies to tell them to carry homeowners insurance, landlords shouldn’t have to tell renters to get insurance.
Without the proper insurance as a renter or a homeowner though, one large loss could mean never getting to buy either policy. That may sound like a dream come true, but ask someone without a roof over their head if they’d like that opportunity. Some of them would probably love to read a policy’s fine print.
Follow Desiree on Twitter @DesireeBaughman.