Before I moved to my new place in Palo Alto last month, one of my close friends gave me this piece of advice: get renters insurance. He regretted not getting it after burglars broke into his apartment in the Bay Area and stole thousands of dollars worth of electronics and jewelries. His personal experience persuaded me to research more into renters insurance, and here are my three surprising learnings that convinced me to get insured.

1. The price is worth it

Almost every blog post and insurance company claims that renters insurance is a small price to pay for large potential losses. But is it worth it? After all, insurance underwriters must have done their math to make sure they still make profits. I decided to crunch some numbers and answer the question myself.

Renters insurance covers your personal property, and the two most common perils are fire and theft. According to the FBI, there were 1,579,527 burglaries that took place in 2015, with an average of $2,316 in property loss per case[1]. In the same year, there were 1,345,500 cases of residential fires, with an average loss of $20,700 in property damage per incident[2]. That number includes both structural and property loss, so let’s assume each fire incident will destroy $10,000 worth of your property. There were also 124.6 million households in 2015.

With these numbers in hand, we can calculate our expected monthly losses for burglary and fire accidents.

Since burglary and fire accidents don’t happen in the same frequency, we need to weight the two expected monthly losses. The final number comes out to be $10.12. This amount represents the monthly insurance premium for which we’ll break even from our expected losses from fires and burglaries alone.

It turns out the average renter insurance cost around $12 per month, and it includes much more coverage than just fire and burglaries[3]. Liabilities, medical expenses, and other protections will bring the expected monthly cost much closer to $12. So mathematically, getting renters insurance is a smart decision.

What’s in it for insurance companies to offer renters insurance then?

It turns out insurance companies can still make money even if the margin on renters insurance is low. The first way is to make you become their customer so they can sell you other products like auto insurance, which has much higher premium. Another way is to invest the premiums that they have collected. Insurance companies receive a steady inflow of money and only need to pay out when an accident happens in the future, giving them capital to loan out and earn interests in the meantime.

2. You have more stuff than you realize

Between electronics, jewelries, clothes, kitchenwares, and other valuables, you probably own much more than you think. According to USAA, an average renter has $20,000 in possession. Allstate has it even higher at $30,000[4].

It’s also important to note that the items we lose are depreciated, but we usually purchase brand new replacements. So you will most likely end up spending more money to buy the replacements than the actual value you lost. Fortunately, renters insurance is usually on a replacement cost basis, so you will be reimbursed on the amount that you spent to purchase the replacements.

3. It offers liability coverage

Perhaps the most overlooked — and important — part of renters insurance is the liability coverage. Whereas personal property coverage insures things that you own, liability coverage insures any bodily injury or property damage to others caused by you. Examples include someone slipping and falling in your home, your dog biting a guest, etc. While these incidents happen much less frequently than fires and burglaries, they can easily cost you a fortune in loss settlements and potentially wipe out your bank account. As a reference, the average dog bite settlement was $32,072 in 2014. The number is even higher in California at $33,649[5].

A typical renters insurance policy will cover you up to $100,000 in settlements and legal fees. Your insurance company is also obligated to hire lawyers and defend you in court.

Ready to get renters insurance?

Check out this blog post on learnings and tips from my journey of getting renters insurance. I also have a tool that will get you quotes from the top insurance carriers near you, rentersinsurancetool.com.

For any questions about this blog post or renters insurance in general, feel free to email me at rentersinsurancetool@gmail.com.

References

[1]:https://ucr.fbi.gov/crime-in-the-u.s/2015/crime-in-the-u.s.-2015/offenses-known-to-law-enforcement/burglary

[2]:http://www.nfpa.org/news-and-research/fire-statistics-and-reports/fire-statistics/fires-in-the-us/overall-fire-problem/fire-loss-in-the-united-states

[3]:http://www.moneytalksnews.com/5-myths-renters-insurance/

[4]:http://www.bankrate.com/finance/insurance/how-much-renters-insurance.aspx

[5]:http://www.insurancejournal.com/news/national/2015/05/15/368180.htm