7 Types of Insurance Every Property Investor Should Consider
As investors, we’re in the business of dealing with risk. We approach every deal with the hope of making money, but we must also face the brutal reality that owning real estate carries certain liabilities and risks of incurring losses.
We have four primary ways of dealing with risk. We can avoid it, accept it, reduce it or transfer it. By purchasing insurance, we are transferring risk to an insurance company.
Insurance is a brilliant invention for sharing risk with others. The insured pays the insurance company a premium in return for the insurer accepting the risk. The insurer then agrees to pay the insured for any loss suffered if the risk eventuates. The insurer uses the collected premiums from all of its clients and income earned from investing those premiums to compensate the insured individuals who end up suffering losses. It’s a true win-win.
The following are seven types of insurance that every property investor should consider carrying. These ideas are for educational purposes only and are not intended to be financial advice. They are not recommendations about financial products that you should buy. Before making any financial decisions, you should consult a qualified professional.
Public Liability Insurance
Public liability insurance protects you or your business from the financial risk of being found at fault to a third party for death or injury, loss, or damage of property or economic loss.
For instance, if your tenant or their guest was injured at your home or their belongings were damaged due to faulty maintenance or unsafe conditions, you could be found financially liable.
One example of a liability claim might be if the ceiling in your garage collapsed and damaged your tenant’s car. Another example might be if a tenant’s guest falls and breaks her leg on a broken front door step.
Even if you’re not at fault, you could incur substantial legal and court costs while defending yourself. Liability insurance will generally cover these legal costs associated with claims against you.
Most policies have options for coverage in the range of $5 million to $20 million.
Building insurance covers your dwelling against incidences of theft and against damages, such as from vandalism, fire, flooding or storms. Most policies exclude coverage for significant natural disasters like river flooding, earthquakes or cyclones, especially if your property is in an area prone to these types of occurrences. Additional policies can be taken out; however, to cover these specific events.
Policies will specifically state what is covered. Be sure you clearly understand what constitutes coverage of flood damage, and whether the policy covers damage to additional buildings on site that are not attached to the main dwelling, such as a shed or granny flat.
Contents insurance protects against loss of items that you own inside your property, such as furniture, appliances or other personal items. Claims can be made if these items are either stolen or damaged by fire or water.
Contents insurance for landlords is generally only necessary when you are renting out a furnished property or offering appliances, such as a refrigerator or washing machine as inclusions.
Landlord insurance is a catchall policy that covers the previous three areas of risk mentioned above, as well as other potential losses faced by landlords. The following are the key areas of risk covered by many landlord policies:
- Public liability cover
- Damage to buildings by fire, water or theft
- Contents cover
- Damage caused by tenants
- Loss of rental income from unpaid rent
- Legal costs of action against tenants
- Replacement of locks
- Re-letting expenses
- Tax audit costs
Of course, every landlord policy is different, so be sure that you are covered at least against the basics of legal liability, the building and any contents you may have in the property. Some landlord policies require additional premium payments for building insurance. Be sure to read the wording of the policy carefully, and then clearly identify any risk factors that may be excluded from coverage.
Under a term life insurance policy, the life of an individual is insured for a specific amount.
In the event the insured person dies or is diagnosed with a terminal illness, the insurance company will pay the benefit amount to the surviving policy owner, the estate of the deceased or the person nominated as the beneficiary on the policy.
Total and permanent disability policies are also available that pay out in the event that the insured is unable to ever work again.
When determining the appropriate level of cover, consideration should be given both to paying off household debts, as well as covering ongoing cashflow commitments that would be required to be paid by the surviving spouse and children. Property investors generally carry a significant amount of debt, and have further considerations beyond the typical family.
If you carry debt on your investment properties, it’s important to consider the financial impact on loved ones from your death. Are your properties negatively geared? If so, your portfolio relies heavily on your future earning potential. Carrying additional life insurance can pay down those mortgages to improve cash flow, or the funds can be used to meet cash flow shortfalls.
If you are a member of a large joint venture development, it may be wise to consider carrying life insurance on those parties who are integral to the success of the deal. Generally, you can insure the life of those for whom you have a personal financial interest.
Income Protection Insurance
One of your greatest assets is your ability to continue earning an income. Income protection insurance provides a monthly benefit of up to 75 percent of the insured’s earned income, in the event of being unable to work due to sickness, illness, injury or accident.
When determining a level of cover, be sure to take into consideration not only your normal living expenses, but also your costs of owning investment properties. If your property portfolio is negatively geared, you will ideally want a solution for paying these ownership costs if you were to lose your income.
Because income protection cover is limited to 75 percent of your income, if you have a significant cash flow loss on your properties, you may remain unprotected, to some degree. This is one of the risks of holding negatively-geared real estate.
Construction insurance covers you as an owner builder while you are building or renovating property.
If you employ the services of a fully licensed builder, your builder is required to insure the dwelling until the handover. They must also carry builder’s warranty insurance to cover loss or damage resulting from the non-completion of work, a loss of deposit or a breach of their required warranty, due to either death or disappearance of the builder,or if the builder becomes insolvent.
However, if you are an owner builder, you are responsible for insuring the building yourself. Similar to building insurance, construction insurance protects the owner builder during the building process from risks of malicious damage or vandalism and theft, as well as damage from fire, storms, wind and water.
As an owner builder, you are also required to carry home warranty insurance. This is a legal requirement for owner builders in every state but Tasmania.
This cover is for the benefit of the subsequent purchaser of your property, not for you as the owner builder. The policy covers the subsequent owner in the event that you die, disappear or become insolvent, and your building works are incomplete or defective.
If you are renovating a pre-existing dwelling and using the services of a builder, unless the contract states otherwise, you are responsible for insuring against damage to your property. Be sure to sort this matter out with the builder prior to the commencing the work.
With an insurance policy, you are buying peace of mind. Investing in real estate can be stressful enough for most people, so transfer as much risk as possible to insurers. If you can’t afford insurance, than you probably shouldn’t invest in the first place.
In Steve McKnight’s Property Apprenticeship course, we devote an entire session to covering in depth the topic of insurance for property investors. We include insights on all of the following and more:
- where to find the right insurers
- why insurance is important
- the jargon and terminology of the insurance industry
- the types of insurance property investors need most
- when it is vital to insure, and
- how to reduce risk to minimise insurance costs
When it comes to property investing, knowledge is power and profit. Make sure you understand what your responsibilities are as a property owner, so you can reduce your risks.