Whether you rent or own – insurance is a must. We live in a world where unexpected events happen all the time.
Maybe your kid hits a baseball through your home’s window. Or your upstairs neighbor floods their bathroom, resulting in water damage to your apartment…..insurance will have your back when the unforeseen happens.
Homeowners insurance and renters insurance both cover slightly different types of property damage, and it’s good to know the difference before you get coverage.
What is homeowners insurance?
Homeowners insurance is designed for those who own their homes, whether that is a house, condo, or apartment. In fact, most insurers who offer “condo insurance” are offering you the same policy that they offer to traditional homeowners. This is because owners with mortgages are usually required to get homeowners insurance, regardless of the type of dwelling that they own.
To figure out how much insurance coverage you qualify for, you’ll determine the value of your home and major possessions. What insurers look at is the replacement value or the cost of rebuilding and replacing everything — as opposed to the market value of the home.
What is renters insurance?
Renters insurance policies are purchased by tenants who live in a building someone else owns. The homeowner or management company has a separate policy to protect the building.
Homeowners’ policies won’t extend to renters’ personal belongings, however — that’s where renters coverage comes in.
Many renters are required to purchase this insurance as a condition of their lease (I was).
What homeowners insurance covers
Dwelling coverage
Dwelling coverage is the key difference between homeowners and renters insurance: only homeowners insurance includes dwelling coverage, which covers damage to the actual structure of the home.
This includes anything from a broken door or window to total building demolition. Dwelling coverage extends to other structures on property you own, such as a fence, garden, or garage.
Not all damages will qualify you for a payout. Most companies have what’s called a “named peril” policy which lists qualifying perils or “covered events” — the damages your insurance will pay to repair. Weather phenomena like heavy wind and hail, two of the most common dangers, are usually on the list.
Other covered events might range from smoke, fire, falling ice, and water damage to vandalism and theft.
Personal property
Personal property coverage protects the belongings inside your home. Even if the object isn’t physically in your home — for instance, if your laptop or bicycle is stolen from your car — the policy kicks in.
For homeowners, the price is usually included as a percentage of your dwelling coverage, but you can raise or lower the amount as needed before buying a policy.
Personal liability coverage
If someone’s injured in your home, or if someone sues you for damage to themselves or their property, this is where personal liability insurance comes into play. The amount is flexible. Pet owners whose animals tend to be aggressive, for example, often end up paying more.
Medical payments
This insurance covers medical costs if someone gets hurt on your property and needs a doctor’s attention. Unlike personal liability, medical coverage is on a no-fault basis; you won’t be held legally liable.
Additional living expenses
This catch-all phrase just means you’ll have money for living expenses, including a hotel or rental property if you need to vacate your home after a covered peril.
What homeowners insurance doesn’t cover
Floods and earthquakes are major enough to require their own separate policies. They’re almost never included in dwelling coverage. If you live in a flood- or earthquake-prone area, you can get additional coverage for a cost.
And insurance providers won’t cover homeowner neglect: damages that could have been prevented by basic maintenance and upkeep.
Policies also don’t extend to government demolition or power failure (if the power source is outside of your residence).
What renters insurance covers
Personal property
This is mostly what you’re paying for. Renters insurance protects your personal property — electronics, clothing, equipment, and other valuable items.
Before buying a policy you’ll take an inventory of what you own and determine what it costs to replace. This approximate amount will be your coverage limit.
You may have the option to select “replacement-cost” coverage or “cash-value” coverage (the cash value of your belongings). Replacement-cost means a bigger payout if your items are damaged or destroyed, so the policy is nominally more expensive — $20 to $50 a year more.
Cars aren’t included in the policy since they’re covered under your auto insurance. Objects stolen from your car will be covered, though, even if the car’s not on your property at the time.
Personal liability
This coverage kicks in if someone’s injured on your property, much like homeowners coverage. It also protects you from a landlord’s lawsuit if you cause accidental damages to the building.
Medical payments and additional living expenses
Both homeowners and renters get this coverage.
What renters insurance doesn’t cover
Since renters don’t own the buildings they live in, their insurance won’t include dwelling coverage, which means it won’t pay for structural damage to the building.
As with homeowners policies, renters’ personal property compensation is limited to “covered events” or perils listed by the insurance company.
And unless you’re married or living with your family, a renters insurance policy will only cover the belongings and liability of the person who pays for it. If you have roommates you’ll need to get separate policies if everyone wants coverage.
Homeowners vs. renters insurance: the cost breakdown
Homeowners pay more
Since homeowners generally have more space to insure and a higher average replacement cost, they’ll pay much more.
How much you’ll pay as a homeowner depends on your state, your location, your liability risk, and the replacement cost of your home.
The National Association of Insurance Commissioners estimates the average annual homeownership premium was $1,192 in 2016—about $100 in monthly payments. Since then the price has only gone up; homeowners might pay anywhere from $400 to $3,000 per year.
Renters typically pay less than $30 a month
Renters only paid an average of $185 per year in 2016 for their policies, or around $16 a month. Costs vary according to circumstances, but these days renters insurance is still under $30 a month for most tenants.
I’m paying about $10 a month. I did a brief inventory of my possessions before picking a policy. Though I selected the lowest amount of coverage available, I still got a pretty hefty replacement value higher than the cash value of my stuff.
You’ll have a deductible for both types of policies
Both types of policies require you to meet a deductible (not unlike health insurance) before making a claim. Depending on your insurance provider you’ll pay a small monthly amount or a larger yearly lump sum.
A few factors that might raise your rates:
- Location in a natural disaster zone.
- An older home or a home that needs frequent repairs.
- A larger home.
- A history of filing multiple insurance claims.
- Your credit (some states offer lower premiums to homeowners or renters with good credit history.)
In some cases, the insurance premium can be rolled over into your mortgage. Keep in mind this will increase your mortgage debt and affect the loan terms.
Which insurance is right for you?
The answer will depend on whether you’re owning or renting. Mortgage lenders usually require borrowers to have homeowners’ coverage, and landlords may require renters’ coverage.
Renters should make sure to get a policy that protects their personal property, not just the landlord’s liability.
If you own a home and rent rooms
A homeowners’ policy makes sense if you live in the building full-time or if you have furnishings and belongings there you want to protect.
Homeowners’ policies don’t typically cover damage caused by renters, so your renters should be encouraged to purchase their own coverage.
If you don’t live in the building, you might be considered a renter yourself, meaning you might not need a standard homeowners’ policy. Different insurance providers have different guidelines. When in doubt, however, it’s best to get full coverage including dwelling coverage.
If you live in a rent-to-own space
Most often you’ll be considered a tenant until you actually purchase the home. As a tenant, you’ll need renters insurance.
Once you officially own the home you’ll have to cough up for homeowners insurance, but not until then.
If you live in a co-op or condo
These housing arrangements may have specific insurance requirements. As a general rule, however, condo owners will want a homeowners policy with dwelling coverage.
Co-op owners only own a percentage of their building, so a renters or tenant policy should suffice.
Summary
It’s always worthwhile to insure your home. What would you do without it? Fortunately, you can get affordable and appropriate coverage whether you’re owning or renting.
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