Wealth Club: Burglars, Bananas, and Why You Need Renters Insurance

In our new financial advice column for the centsless, Michael Fleck fields your questions on how to get your money right. Send your queries to wealthclub@goodinc.com.

A burglar recently broke into the home of a friend of mine while he and his roommates were sleeping. Only a few items were taken—a 37’’ TV, a lamp, and a pair of earrings. Several days later, the police recovered the TV and the lamp; unfortunately, the earrings were never seen again. My friend said that because the bigger-ticket items were returned, she probably wouldn’t even bother filing a claim on her renter’s insurance. I don’t even have renter’s insurance, so all I could offer was a cordial nod and a “yeah, that makes sense.” But now I wonder—is renter’s insurance something I should have? How does it work if your house gets robbed? I don’t really own any super-valuable items, so it seems like renter’s insurance is pointless.

In the immortal words of The Dude: That’s a bummer, man. First, let your friend know that it could have been worse, especially since they were upstairs when it happened! Things are just things, personal safety is #1. But I won’t lecture you about the steps they should take to secure their home. How can I do that when I have the scintillating topic of renter’s insurance dangling in front of me?

To my mind, renter’s insurance is a necessity for all renters, and not just because of all that cool stuff you own, as we’ll see.

It should only cost you about $10 to $30 a month, and that’s typically payable all in one lump sum for the year ($120-$360), so you only have to spend it once, and you’re covered for 365 days. If that doesn’t convince you, think about how much it would cost to replace the 10 most expensive items you own. I’m guessing that $360 is looking a lot more palatable. If you’re counterargument is that you don’t live in a high-crime area, then I say think about fires, tornadoes, and other natural disasters that could happen to anyone. My apologies for bringing down the mood.

Now, let’s talk about your stuff. An interesting consideration when looking into renters insurance is Actual Cash Value versus Replacement Cost Value. This is a choice that you, the policy owner, get to make. ACV means that had your friend filed a claim on the purloined TV, the insurance company would only reimburse the depreciated value of the TV—if it was purchased three years ago, your friend isn’t not going to get the sticker price. With RCV, the insurance company will reimburse based on how much it would cost today to replace the TV with a current TV with similar specifications. For people who see things mathematically, RCV – Depreciation = ACV.

Because RCV will yield a higher payout, the annual premium will be higher than with ACV. But you know what’s worse than having your TV stolen? Having your TV stolen and then going 10 rounds with your insurance company over the depreciated, “actual” value of the TV. For me, it’s worth the extra you pay in premium, but that’s something you need to consider.

Now for the part I hope you never have to actually experience: You’ve been burgled, a freak earthquake hit, or golf ball-sized hail came crashing through your ceiling. It’s actually pretty easy to file a claim. Make a list of all the belonging that have been stolen or damaged. This part is actually easier if crime is involved, since you’ll most likely have to explain it all to the police anyway. Either way, figure out what was damaged and ballpark how much the damage cost. Don’t lie—insurance companies frown on that.

I’ll take this opportunity to also suggest that once a year, you should go through your house with a digital camera or smartphone and film all of your belongings, while narrating what everything is. This will make your life a lot easier when trying to convince the insurance company that you did actually have a 37” television, and will give you a chance to use that British accent you’ve been working on. Pretend it’s Antique Roadshow.

Let me quickly address your friend’s concern about filing a claim on the earrings. Unless the earrings are worth more than the deductible, which is generally $500 or $1,000, don’t bother. The deductible is the amount that the policy owner is responsible for before the insurance company will pay out any claims. Furthermore, jewelry is a special exception in most insurance policies; companies generally set a limit (typically $1,000) on the amount they’ll pay out for certain categories of loss. Another possible consequence of submitting a claim is that you run the risk of having your premiums increase or even losing coverage on the subsequent annual renewal. Without knowing too many details, and assuming the earrings are under $500 in value, my response to your friend is her instinct is correct: It’s probably not worth the trouble to submit the claim.

But Mike?! What’s the point in having renter's insurance if you’re not even going to submit a claim? Well, I’m glad you asked. Here’s the punch line. Think about the common misconception you’re buying into here: You need renter’s insurance in case your stuff gets wrecked. But in fact, renter’s insurance is NOT for property loss. It’s certainly a good thing to have on your renter’s policy, and it becomes more important as you start accumulating assets that are worth more, but personal property coverage is ancillary.

The reason you need personal liability coverage is because you woke up late for your bosses’ summer picnic, and had only frantic 10 minutes to make a fruit salad, so you didn’t realize that the banana peel didn’t make it into the garbage. Nobody slips on banana peels outside of movies, but when everyone came back to your house for the after-party, somebody’s friend had a few too many and tumbled down the stairs because you decided not to fix that loose banister. Personal liability covers bodily injury or property damage caused by your actions and negligence, and has the potential to cost you a lot of money in both medical bills and/or other damages.

I try to stay away from imposing any hard Wealth Club rules because everyone’s situation is different, but from time to time, I must. Here it is: If you decide that renter’s insurance is right for you, and I hope you do, then you must make sure that personal liability coverage is part of the policy. There’s a reason why when you buy a house, the mortgage company makes you get homeowner’s insurance: Unexpected disasters can, and do, happen all the time. And since the house you “own” is really the collateral of the lender, they are making sure their ass is covered. The same principles apply for renters, except there’s no risk fairy looking over your shoulder when you’re a renter. (At this time, I’d also like to call first dibs on Risk Fairy for Halloween 2012). It may seem like a gamble—and like all insurance, in a way it is—but it has the potential to save you money, time, and most importantly, emotional sanity.