We take a look at "how much landlord insurance do I need," by understanding typical premiums, coverage types and levers to potentially control costs.
Investment property insurance is the anchor to a strong risk-management program for landlords. While it may be clear that this coverage is needed, or even required, how much coverage is often a bit more confusing. To help clear things us, we’ll start by comparing landlord insurance with homeowners insurance, to understand the key differences and why your primary residence policy may not suffice for your rental property. Understanding these distinctions is crucial in determining how much coverage you require as a landlord. We will also discuss what affects your landlord insurance premiums and provide practical tips on how to lower them without compromising the quality of coverage. From liability coverage considerations if a tenant slips and falls, to comprehensive protection against lost rental income if a tenant has to vacate due to a fire – it’s all important to weigh when you ask “How much investment property insurance do I need?”
What is Landlord Insurance?
Landlord insurance, also referred to as rental property insurance, is the primary coverage that property investors need to obtain before they add on additional protections. It provides a necessary safety net when unexpected issues arise with your investment properties. It provides financial protection for covered causes of losses (or perils) resulting from things like fire, theft, vandalism, and other property disasters.
The Basics of Landlord Insurance
Imagine this scenario: an accidental fire severely damages your rental property. Fortunately, you have dwelling protection as part of your landlord insurance. This coverage takes care of the physical structure where your tenants reside, whether it’s a small cottage or a large apartment complex. So, if a major loss unfortunately occurs, you won’t have to look to your funds for repairs. Additionally, liability protection acts as a further shield for your finances. If someone gets injured on your property and you’re held legally responsible, this component helps cover their medical expenses and legal fees. Lastly, landlord insurance includes what is typically called loss-of-rental income coverage. If the extensive fire results in your property becoming uninhabitable your tenants would not be able to occupy the property, resulting in a loss of the rental monthly income until the property is restored. In such cases, this component steps in to compensate you for the lost rental income while you work on getting things back in order so that you can pay utilities, lenders, etc.
Let’s examine the restrictions of this coverage. Most important, your tenants’ personal belongings are not included. They’ll need to get their own renter’s insurance for that. And intentional damage caused by tenants is typically excluded.
Landlord Insurance vs. Homeowners Insurance
Realizing the contrast between landlord insurance and homeowners insurance is critical when safeguarding your property. Both policies provide coverage for the property, but their purpose is dependent on how it’s used.
Homeowners insurance, as its name suggests, is designed to protect properties that are used as primary residences by their owners. This type of policy covers damage to the structure of the home, personal belongings inside the house, liability in case someone gets injured on your premises, and additional living expenses if you need temporary housing while repairs are being made after a covered loss.
Landlord insurance, also known as rental property insurance, provides coverage that is designed for properties that are rented out to tenants, either short-term or long-term. It typically includes building coverage (for damage caused by fire, windstorm, and other perils), loss of rental income compensation (if tenants have to vacate the property due to a covered loss), and liability protection (in case a tenant or visitor suffers injury due to negligence).
The Key Differences Between Landlord Insurance And Homeowner’s Insurance
- Coverage Scope: While both types cover physical damages from certain risks like fire or theft, homeowner’s policy extends this cover to personal belongings too, whereas landlords do not unless specified otherwise because landlords usually don’t keep their personal items at rented places.
- Rental Property Liability: Landlords can be held responsible for accidents happening on their premises, hence requiring more comprehensive liability protection, which isn’t included in standard homeowners’ policies.
- Loss Of Rental Income Coverage: This feature is unique only to landlord’s policy where it compensates landlords when they lose rent during periods when their rental units become uninhabitable due to insured events such as fires.
If you’re an investor who rents out houses or apartments regularly, then having adequate landlord’s insurance becomes vital because, unlike homeowners’ policies, these plans account for specific challenges faced by landlords, including potential legal disputes with tenants among other things mentioned above.
However, if renting isn’t something done frequently – say just occasionally through platforms like Airbnb – then some insurers might allow adding a ‘rental rider’ onto an existing homeowner’s plan instead of getting a separate one altogether, thereby saving costs while still staying protected against associated risks.
Once you have a long-term tenant residing in your primary or secondary home, it is necessary to switch from a homeowner’s policy to an appropriate landlord’s policy as the former does not cover professional letting activities and could result in the denial of claims.
Remember you must disclose to your insurer about the intended usage at any given time to avoid complications later down the line and ensure a full payout in the event a claim arises.
In a nutshell, choosing the right kind depends largely upon the nature of ownership, whether owner-occupied versus non-owner.
How Much Does Landlord Insurance Cost?
Curious about the price tag of landlord insurance? You guessed we would warn this but there’s no one-size-fits-all answer. The cost depends on factors like location, property value, use, and coverage type (including limits and deductibles).
That said, according to thebalancemoney.com, the national average for landlord insurance is about 15%-20% higher than homeowner’s insurance, or about $2,650-$2,766 per year.
Factors That Affect Premium Costs
Wondering why your landlord insurance premiums seem particularly expensive? Here are a few reasons that could be driving up the cost:
Your rental property’s location plays a big role in determining your premium. Factors such as the distance to the coastline, brush areas, and fire departments impact the underwriting of your properties. For example, properties typically located closer to the coast or brush have higher risk profiles for flood or fire than those properties that are many miles from either. Similarly, if your property is located near a full-time fire department (as opposed to a volunteer fire department) this can help reduce the risk of extensive fire damage to your property resulting in lower risk and potentially lower premiums.
Size and Type of Property
The size of your property can have a direct impact on its value and the potential risks involved. Larger properties generally have higher values but also come with additional risks due to their larger square footage. Moreover, the type of occupancy also plays a role in determining risk levels. For instance, an office space with limited visitors is less likely to experience accidents or fires compared to a dine-in restaurant that sees significant daily foot traffic and operates commercial ovens in its kitchen. And, of course, renting your primary home to tenants comes with added risks compared to owner-occupants.
Age and Condition of Building
Insurers are heavily focused on the age of your building systems such as the roof, plumbing, electrical and HVAC systems. Typically, properties older than 20-30 years of age require a partial or full update to these systems. Certain companies will provide limited coverage policy forms, or decline the risk altogether, for things like older roofs that have not been replaced in the last 20 years.
Potential Liability Risks
Be aware that so-called “attractive nuisances” like ponds swimming pools and trampolines (particularly those in the front of a rental property) can limit your landlord insurance options as carriers view these as higher risks or potentially knock-outs from coverage.
Saving Money On Your Premiums
Fortunately, there are steps you can take to potentially lower the cost of your landlord insurance. One option is to install safety features such as centrally monitored fire and burglar alarms or sprinklers, which can reduce risks. Additionally, requiring renters insurance (where allowed) is a valuable risk-transfer tool for landlords. With renters insurance in place, expensive claims can be avoided on the landlord’s policy as they are covered by the renters’ policy. This also helps prevent disputes between tenants and landlords.
Bundling Policies Can Save You Money.
By combining your property and liability coverage into a business owner’s policy (BOP), you have the opportunity to lower your total premium. Additionally, if you own multiple properties, consolidating them under one master policy can result in significant cost savings. Not only can you control the aggregate liability limits more effectively, but there are also other opportunities to reduce your costs when all the property risks are combined on a single policy.
Increase Your Deductible To Lower Your Premiums.
You can increase your deductible to lower your premiums as you are effectively self-insuring some of the risks. Of course, it’s important to understand the consequences of the additional out-of-pocket expenses that may arise alongside the larger self-retention amount.
Most important, don’t focus solely on the cost. Make sure you have the right coverage to protect against all potential key exposures. Reach out to an experienced insurance agent for assistance in finding robust coverage for your rental property at a competitive price.
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