If you do an internet search for renter's insurance you will find plenty of articles (of which a disproportionate amount are written by insurance companies) telling you that renter's insurance is definitely worth it. Most of the internet agrees that it's a good idea, yet in 2018 only 46% of renters had renter's insurance compared to 91% of homeowners [Source]. I will take the opposite point of view and argue that renter's insurance is a racket by the insurance industry and in most cases is a waste of money for the policyholder. Here are a four reasons why: 1. On average, you lose money on an insurance policy. Like every business, the insurance industry exists to make a profit. They will not sell policies that, on average, lose money for them. This is the equation that determines what you are charged for your policy: Policy cost = ( Loss amount x Probability of Loss ) + Overhead costs + Profit As you can see, when you buy any insurance policy, you are always on the wrong side of this equation. This is why self insurance is usually preferable when possible. When you self insure, you don't have to pay for anyone else's overhead or profit. Insurance is like the bad luck version of the lottery. As you may know, the lottery is also known as a tax on people who are bad at math. Sure you might hit the jackpot, but the expected return from playing is negative. Same thing with insurance. You may need to use your policy one day, but on average, you will come out ahead not paying the premiums over the long run. The only times purchasing an insurance policy makes sense is when:
In the second case, a policy is an appropriate risk mitigation strategy against a catastrophic loss that would set you back severely. An example is homeowner's insurance. You are insuring an asset. Most people can't afford to replace their house if it burns down. Even if mortgages didn't require it, homeowner's insurance would still be a good idea for most people. 2. The "junk" you insure under Renter's Insurance policy isn't that valuable. If you are renting your primary residence, what assets exactly are you insuring? Your TV? Your electronics? This stuff is "junk" and you know it. I call it junk because it's not an asset you invest in. It's something you buy that immediately depreciates in value and is inherently useless when it comes to generating any kind of economic value for you. Yes, you can argue that you may need something like a computer for work, and therefore it does have an economic value, but let's face it... this stuff is not that expensive. It should all be self insured. This is what emergency funds are for. You do have an emergency fund, don't you? If you've bought so much "junk" that you need to buy insurance for it ... and you still rent ... then you need to re-evaluate your priorities. 3. Dealing with the insurance companies Many policies have these things called deductibles. Not only is your stuff not worth that much to begin with, but you will probably have to pay for a good chunk of it out of pocket anyway. When you do file a claim, the insurance companies tend to have a habit of trying to find any excuse they can not to pay out. And even if they do, they may try to raise your rates going forward or drop you all together... Something to think about before you file your claim. It can make you feel like you were just flushing all those premiums you paid down the toilet. 4. But what about the liability aspect? An argument that the internet likes to make is the liability aspect... the idea that someone will sue you if they slip and break their back in your apartment... or that your landlord will come after you if you accidentally burn down the building. These are scare tactics by insurance companies to try to get you to buy their product. Do you really think your landlord will come after you if you accidentally burn down the building? His $10 million building is gone... You must pay? Think about this for a minute... If he's not an idiot, he has a policy on the building and his insurance company will be the one paying. Sure they can come after you to recoup, but why would they bother? The cost of trying to litigate it would probably be higher than what they can expect to get out of you anyway. The average net worth of a homeowner is $195,400. The average net worth of renter is $5,400 [Source]. Who in their right mind would waste their resources trying to get $10 million from Mr. $5,400? That is unless you had a renter's insurance policy... in which case it becomes a self-fulfilling prophecy. It's probably why some landlords require their tenants to have renter's insurance. It keeps their policy costs lower. With all the pro-renter's insurance propaganda going around, people will be getting it anyway so they won't even have to lower the rent to offset the extra expense on your part. Health insurance makes sense... Homeowner's insurance makes sense... Renter's insurance? Not so much. This is one of those cases where you are better off self insuring. And beware of sampling bias on the internet when deciding if renter's insurance is for you. You will see stories plastered all over the internet of people who lost their belongings and were glad they had renter's insurance. It's a compelling story. Just like the lottery jackpot winner. But they are the only ones doing the talking. Nobody hears from the many, many more who spend hundreds of dollars on lottery tickets a year and have nothing to show for it, or who never bought renters insurance and never needed to use it. Because they don't have anything to talk about.
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