Often insurance is one of the last loose ends people tie up before renting out their property.
However, insurance should be more than just an afterthought.
If you don’t have the right policies, not only are you putting your investment at risk, but you could also put your entire financial well-being in jeopardy.
No matter if you are using a professional property management company in Howard County, or are trying to manage your property by yourself, as a landlord you have unique insurance needs.
Before bringing on any tenants you need to make sure that you have the right kind of insurance for your rental property, that you have high enough policy limits, and that you make a wise choice about your deductible.
What Types of Insurance Do You Need?
Landlord Policy
Often landlords have some type of homeowner’s insurance policy on the properties they own. But, most homeowner’s policies are only for owner-occupied homes. You need to have a landlord insurance policy.
A basic landlord policy will protect you against damage to the property from many kinds of natural disasters, including fires and some storm damage.
Just like with homeowner’s insurance you will likely need to get separate flood insurance. Landlord insurance also protects you if one of your tenants gets hurt and sues you.
You can add many different protections to a landlord insurance policy. If you are using a Howard County property management company you will want to make sure both you and the company are protected under the policy. Some carriers offer insurance for fair rental income to help replace rent you lose if the property becomes uninhabitable.
Landlord policies do not cover the tenant’s personal property. You should encourage renters to get their own insurance. It may even be wise to require renter’s insurance as part of the lease. This can help shield you if one of their guests gets hurt on the property because of the tenant’s negligence and it makes sure everyone has some coverage if disaster strikes.
Umbrella Policy
Another type of insurance policy landlords are wise to obtain is an umbrella policy. An umbrella policy shields you from excess liability that exceeds the limits of your landlord policy. There are two types of umbrella policies, personal and commercial.
Every carrier is different, but typically a personal umbrella policy will only cover one or two rental properties. The premiums for a $1 million umbrella policy are relatively cheap and they help protect you from worst case scenarios.
How Do You Know What Limits to Get?
Finding the right mix of coverage and policies is only part of the insurance buying process. You also need to decide what limits you should get.
While it may be tempting to get as low a limit as possible to save on the cost of the policy, realize that the only thing worse than not having insurance when there is a loss is not having enough insurance.
The first step in deciding your policy limits is to know the value of the rental property and everything inside that belongs to you. When you are ready to buy insurance you need to have a frank discussion with your insurance agent about risk factors and the value of your property.
Because real estate values fluctuate you should plan on reviewing your policy limits annually. It is also wise to have limits a little higher than the value of the property to give you a little cushion. Usually small differences in policy limits will not change the premiums much.
Other factors that will affect the premiums and the policy limits are the extras you add to the policy.
Often policies will have caps in what the insurance company will pay out for property damage, liability claims, and lost rent, and it will also have an overall limit on the total amount it will pay out for all types of claims. Make sure you understand what your policy limits are.
Pros and Cons of High Deductible Policies
One way to save money on insurance is to select a policy with a high deductible.
If a policy has a $25,000 deductible, you will have to pay for the first $25,000 of damages on any claim before your insurance kicks in.
If you have a zero dollar deductible, you do not have to pay anything before your insurance coverage starts.
High deductible policies offer several advantages. The higher the deductible on the policy, the lower the premium will be. Insurance is similar to a wager. The insurance company is setting its rates and extending coverage betting that most people will not need to make a claim, or if they do have a claim it will be for less than the lifetime of premiums. This is how insurance companies make money.
When you select a high deductible policy you are betting that the money you save on premiums will make up for any deductible you have to pay out of your pocket.
The danger of a high deductible policy is that if you cannot afford the deductible at the moment you need to make a claim, you will leave yourself financially vulnerable and may put your rental investment at risk. You should never get a landlord policy with a deductible so high that you couldn’t easily pay it, even if you had to dip into an emergency fund or a savings account.
While the cost savings with a high deductible plan can be large, it may be less risky to choose a more moderate deductible.
Sometimes the amount of information available about insurance issues can be overwhelming. But, if you want your rental business to flourish, you have to be protected with strong insurance policies.
If you have a Howard County property management company overseeing your rental, they can be an excellent source of information about insurance and often can even recommend agents or carriers to help you protect your investment. Because of their years of experience, they often have a good idea of the common types of claims that get made in the area.
