Everything You Need to Know About Renter's Insurance

Even with red-hot rental markets in many parts of the country, only about 40% of tenants have renter's insurance, according to the Insurance Information Institute. (If you own a home, your lender probably requires you to carry homeowner's insurance.) Bob Hartwig, president and economist at the institute, says misperceptions and outdated assumptions keep people from protecting their stuff. "We have tendency to think about apartments as these smaller places where we don’t keep much of value, but we’ve become a nation of renters," he says. Here's what you need to know about renter's insurance.

Why do I need renter's insurance? In a nutshell, because your landlord's insurance only covers the structure you live in, not the belongings you keep there. "In addition, renters underestimate the value of their possessions and would be surprised by how much it would cost to replace the items they have accumulated," says Jovana Evans, director of property product research for Liberty Mutual Insurance. By the time you tally up all your clothes, furniture, and electronics, you could easily be looking at a loss of $25,000 or more, she cautions.

What does it cover? Broadly speaking, there are three ways renter's insurance protects you, says Laura Adams, senior insurance analyst at InsuranceQuotes.com. Personal belonging coverage pays to repair or replace your possessions when a covered event occurs, such as a theft, fire, or natural disaster. Depending on the type of policy you have, a claim might pay out the current face value of your items, or it might pay to replace them with new ones (you can expect to pay more for the latter.) Liability coverage kicks in if someone gets hurt in your home — say, if a guest trips over your coffee table and needs stitches. Coverage for additional living expenses pays if a disaster displaces you from your home. "It pays some or all of your hotel bills and meals until you can move back in," Adams says. "Some policies give you coverage for a set period of time and others have a financial cap."

Calculator: Should I rent or buy a home?

What doesn't it cover? "Most of the insurance companies impose caps for some of the personal belongings," says Jill Gonzalez, an analyst at WalletHub.com. If you have valuable artwork, silver, antiques, high-end electronics, or a closet full of designer clothes, you'll have to buy policy add-ons, called riders or endorsements, to have those items covered. Also, if you live in a flood or an earthquake zone, you would need to go through the respective federal programs to get insurance for damage caused by those disasters. And pet owners might need to get extra coverage in case their dog chews through a door or bites someone, says Lynnette Bruno, spokeswoman for Trulia.com.

How much does it cost? At just $187, "the national average annual premium for renters insurance is surprisingly low," Adams says. Of course, this varies by where you live; Mississippi is the most expensive state, she says, while North Dakota, where the annual premium averages just $115, is the cheapest.

How do insurers figure out my premium? Insurance companies' underwriting formulas are their secret sauce, but a few variables bound to factor into your premium are the state, neighborhood, and possibly even the building where you live. (If your building has had a series of break-ins, for instance, you might wind up paying more.) How much your stuff is worth is also part of the mix, along with the level of coverage you choose.

Will they look at my credit? Unfortunately for people with poor credit, the answer is probably yes. (The exceptions are Maryland, Massachusetts, and California, which have laws against the practice.) "Most of the insurance companies base their underwriting processes on consumers' credit history," Gonzalez says. "Every company has its own method of calculation and differing levels at which they take credit history into account." On the positive side, if you improve your credit considerably, you could get a better deal if you ask for a new quote.

How can I get a discount? As with homeowner's insurance, bundling your renter's policy with your car insurance can give you a break with many insurance providers. According to InsuranceQuotes data, the average amount you can expect to save is 8% off your combined premium. "Additionally, renters might also be able to ask for a discount if they install certain safety features in their rentals, such as a fire or burglar alarm, fire extinguishers, sprinkler systems, or a deadbolt lock," advises Trulia's Bruno.

How often should I shop around for a better deal? "A good time to think about shopping around is perhaps if you move — if you’re changing from one apartment to another, if you’re upgrading," Hartwig says. "Those are always good times." Also, you should check in with your agent and maybe do some comparison-shopping if you get a new car, pet, or acquire a valuable item like an engagement ring or heirloom.

Read next: Four Rental Fees You Can Negotiate