Purchasing insurance is a necessity for property investors who want to mitigate the risk of unexpected events burning their pockets. Though, for many investors, it can be difficult to decipher what insurance is necessary, when to start a policy and which insurance provider to go with.
A great benefit to property investing is the ability to rent your property and receive consistent cash flow. However, renting to tenants comes with inherent risks. Property investors use landlord insurance to mitigate the risks associated with renting out your property. Most policies cover damages to the property, liability costs, and loss of rental income. These coverages encompass the major concerns landlords face when tenanting their property/s. Note, not all property investors obtain landlord insurance. In fact, some investors opt out of purchasing this product as the likelihood of each of these issues may not come to fruition regularly. However, with the peace of mind knowing your property is covered it is a very common and viable insurance option used by the majority of investors.
Property is physical in nature and with this comes risks associated with the physical dwelling obtained with purchasing a property. Building insurance is the most common and necessary insurance needed by not only property investors but all property owners. Building insurance covers damages associated with as the name states the building of a property. This can stem from damages from tenants, thefts, or natural disasters. An investor will want to purchase a policy with the widest coverage available. This mitigates the likelihood of you being placed in a situation where damage occurs, and you aren’t covered by your policy.
For example, most building insurance does not cover flooding hence why many investors avoid flood-affected areas. Without taking out a building policy an investor runs the risk of fixing all damages which occur on a property. If a property is deemed uninhabitable this would be an extremely expensive cost, emphasizing why building insurance is a necessity.
Income Protection Insurance
A less common insurance policy associated with owning investment properties is that of income protection insurance. As an investor builds a portfolio (particularly if negatively geared) they rely on their day-to-day income to cover property expenses. If the investor was to lose their job, they would be placed in an uncomfortable predicament. In order to protect the investor and the repayments of their portfolio, they may decide to take out income protection insurance. As the name states, this coverage assists investors in situations where they have a loss of income. Most policies can cover up to 85% of your pre-tax income for a specified period of time. So, to provide greater protection to your portfolio and ability to make payments this can be a viable option.
The cost of each of these insurance policies varies depending on the amount of coverage included. Most insurance companies offer landlord and building insurance together, though, the coverage of the building can impact significantly the cost of insurance significantly. As a rough guide, a 500k house with 300k of reconstruction coverage could cost around $1500 per annum. The higher the coverage the higher the premium but most investors can expect to pay between $1000-$2000 per annum for both of these policies. Though, more expensive properties will likely have a higher premium.
Similarly, income protection insurance costs depend on the salary, age, gender and occupation, and any pre-existing health conditions. For example, for a male in their twenties earning 80k a year with 75% coverage the estimated cost by multiple insurers was around $800. So, you could expect to likely pay $1000 if you wanted greater coverage.
Who to go with?
There are numerous insurance companies that offer a range of insurance premiums. However, there are a few companies that specialise within property investment space that may provide more specific coverage for the risks associated with owning an investment property. Many property investors choose to work with these companies as they may be easier to deal with and extend their coverage to greater meet the needs of investors. The companies that specialise in property insurance are EBM insurance, Terri Sheer, and most recently Property insurance plus (PIP). Though, the most common names within the insurance space also offer similar products though the coverage may vary between companies.
Insurance is a necessity in order to mitigate the associated risks of owning an investment property. A property investor can purchase numerous policies in order to cover their liability if issues arise. It is important to understand each of these policies and evaluate whether they should be purchased. Moreover, an investor should carefully read through a policy in order to completely understand their coverage from their insurer. By understanding the necessary insurance options an investment can make better-informed investment decisions.