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Landlord Insurance 101

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We all need insurance in our lives, whether it be auto insurance, life insurance, or homeowners insurance. But if you are an income property landlord, you need as much insurance as you can possibly afford. The reason is that we live in a truly litigious society and landlords are often prime targets for deadbeats looking to make a quick buck.

There are 3 primary types of landlord insurance: property / building insurance, liability coverage, and umbrella insurance. Obviously the first two are most important, but umbrella insurance is also worth considering because it provides a nice safety net.

Property coverage is self-explanatory. If your investment property burns down, you will want insurance to cover the rebuild. This type of insurance is never optional, and in fact you will not be able to get a mortgage without it. Importantly, you will want a policy that provides full replacement cost as opposed to actual cash value because the latter only covers you up to a predetermined limit and thus may not provide 100% of the money needed to rebuild your property.

Three useful riders to add onto your building policy are ordinance of law coverage (pays extra if needed to bring the rebuilt property up to code), loss of income coverage (pays your rental income while the property is out of commission) and sewer / drain backup coverage.

Liability coverage is also mandatory. If one of your tenants slips on ice and breaks their leg, you will probably get sued. Your liability policy will cover you in cases like these. I recommend at least $500K in coverage, but $1 million would be better. Also, stick with a $1000-$2000 deductible to keep your costs down.

Finally, you should look into umbrella insurance. This insurance kicks in when your liability coverage runs out. For example, if you have a $500K liability policy and you get successfully sued for $550K, your umbrella policy would pick up the extra $50K. And this type of coverage is inexpensive as it only costs a couple of hundred dollars for $1 million in coverage.

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