A landlord’s property insurance covers only the physical structure, not the building’s contents, so renters need to protect their belongings with renter’s insurance. Some renters feel they don’t have anything of real value to insure, but remember that even if it’s not valuable, it will cost money to replace. Think of insurance as paying small amounts now towards a potential large bill later. If you never need it, the money has bought peace of mind, and if you do need it, the money replaces your belongings.
When purchasing renter’s insurance there are many decisions you will have to make concerning amount of coverage and deductibles. One of the most important decisions is whether to get actual cash value or replacement cost coverage. These terms refer to how the insurance company determines how much money you will get in case of a loss.
Most standard renter’s policies offer actual cash value replacement. By this method, you receive the actual value of your possession at the time of loss. This is calculated by subtracting depreciation from the cost of a new, comparable item. Depreciation is an accounting method used to spread out the cost of an item over its useful life span. The actual formula to determine depreciation is a little complicated, but in simple terms, it assigns a yearly value to an item, multiplies that value by the age of the item and then subtracts the final number from the replacement cost of the item.
So, an item that costs $1000 new and has a useful life span of 20 years, has a yearly value of $50. If the item is 15 years old at the time of loss, its actual cash value is $250. You would receive $250 from the insurance company for the item, and you would have to pay the additional $750 to actually buy the new one. If most of your belongings are fairly old, you could have significant out-of-pocket costs to replace them all.
Replacement cost refers to what it would actually cost to replace an item with a comparable one. No depreciation is subtracted, so in the above scenario you would receive the full $1000 cost of the item. In most cases, you would first receive the actual cash value of your possessions. Once you have replaced your belongings, and submitted receipts to the insurance company, you would then get a check for the difference between the actual cash value and the replacement cost.
Premiums for a replacement cost policy will typically be about 10%-20% higher than for an actual cash value policy. This extra premium may initially seem high, especially for something you may never need. For anyone who can afford the extra cost, though, it can save you a lot of money should you ever need to file a claim.
When buying renter’s insurance, make sure you understand what your policy offers, and think carefully about the type of replacement coverage you want. Make sure that your choice is spelled out in the final policy before you sign.