Renter's Insurance: The Basics

If you rent a house or apartment and think that your landlord is financially responsible when there is a fire, theft or other catastrophe—think again. Your landlord may have insurance to protect the building you are living in. But your landlord's policy won't replace your personal possessions or pay for your living expenses while the building is being repaired.

The only way to protect yourself financially against disasters is to buy a renter's insurance policy. Renter's insurance, sometimes referred to as tenant's insurance, includes three basic types of protection:

• Personal Possessions
• Liability
• Additional Living Expenses

Personal Possessions

Standard renter's insurance protects your personal belongings against damage from fire, smoke, lightning, vandalism, theft, explosion, windstorm, water, and other disasters listed in the policy. Floods and earthquakes are not covered. Supplemental insurance is available to cover these disasters.

To decide how much insurance to buy, you need to know the value of all your personal possessions—including furniture, clothing, electronics, appliances, kitchen utensils and even towels and bedding. In other words, if your home were to burn, you should have enough insurance to replace all of your possessions.

The easiest way to figure out how much insurance coverage to buy is to create a home inventory (a detailed list of all of your personal possessions, with their estimated value). To help make this task easier, the Insurance Information Institute offers free Web-based software, which you can find at http://www.knowyourstuff.org. An up-to-date home inventory will also make filing an insurance claim faster and easier.

Liability

Standard renter's insurance policies provide liability protection against lawsuits for bodily injury or property damage that you or your family members cause to other people. It also pays for damage your pets cause. So, for example, if your son, daughter, or dog accidentally ruins your neighbor's expensive rug, you'll be covered. However, if your children or pets destroy your own rug, you will not be covered.

The liability portion of a renter's policy pays for both the cost of defending you in court and for court awards, up to the limit of the policy. Liability limits generally start at about $100,000. Some experts recommend that you buy at least $300,000 worth of protection. You can also buy an Umbrella or Excess Liability policy, which provides higher limits and broader coverage. Generally, umbrella policies cost between $200 and $350 a year for an extra $1 million of liability protection.

Your policy also provides No-fault Medical coverage. So, if a friend or neighbor is injured in your home, you can submit their medical bills directly to your insurance company. You can generally get $1,000-$5,000 worth of this coverage. It doesn't, however, pay the medical bills for your own family or your pet.

Additional Living Expenses

Many people don't know that Additional Living Expenses coverage, also known as ALE, is included in a renters insurance policy. If your home is destroyed by a disaster that your policy covers and you need to live elsewhere, renters insurance covers your additional living expenses. Policies will generally reimburse you the difference between your additional living expenses and your normal living expenses. ALE covers hotel bills, temporary rentals, restaurant meals, and other expenses you have incurred while your home is being rebuilt.

Types of Renter's Insurance Polices

Actual Cash Value

An actual cash value policy pays to replace your possessions minus an amount for depreciation (the reduction in the value of items due to age and use) up to the limit of your policy.

Replacement Cost

A replacement cost policy pays the actual cost of replacing your possessions (with no deduction for depreciation), up to the limit of your policy. The price of replacement cost coverage is about 10% more than actual cash value coverage but can be well worth the extra cost.