Do You Need Investment Property Insurance?
When it comes to your investment strategy there is nothing more important than protecting your assets. You have most likely worked extremely hard to acquire and hold them. Investment Property Insurance is a vital part of your asset protection however for many its neglected and has terrible consequences.
Insurance can be expensive when you are starting out with your first investment property. It can be difficult to justify the cost when there is a very low chance you will ever need to claim. Depending on your local taxation regulations (speak with your qualified tax professional) it may be tax deductible though which helps.
There are two types of insurance that would apply to an investment property.
-Building and Landlords.
-Personal Insurance (Life, Trauma, TPD, Income).
Building and Landlords Insurance
Building insurance covers total building loss/replacement as to agreed policy amount.
This is usually required for any mortgage that a bank holds over your property. They would want to see the valid certificate of insurance before settlement.
Landlords insurance on your investment property is optional however highly recommended. It covers two main things -loss of income and tenant damage.
Loss of rent cover for up to 12 months if property become unfit for letting due to an insurable event.
Rent default covers tenant theft, malicious acts or vandalism by tenants
$20 million legal liability cover for injuries to people, or damage to property
Electric motor burn out and power surges
Accidental glass breakage
Most insurers also have pay by the month premiums at no extra cost. By needing building insurance to satisfy the banks lending, you have covered the major risk -losing everything (your capital).
The second risk is rental cash flow and outgoings because of damage
If you lose rent, you lose cash flow, if your property gets damaged, it can dramatically increase your outgoings and temporarily halt your cash flow.
Now the third and not thought of risk is being sued by a tenant for accidental injury or the like. This is uncommon however in our litigated world lawyers love this kind of thing (court battles, court proceedings and suing people in general).
Being sued because your tenant tripped over a wet and twisted board on your balcony because the gutter was leaking over the top of it is an all too real circumstance which could leave you seeking your lawyers protection in court. Having legal liability included in landlords insurance allows you to sleep at night.
Having insurance may however lift your professionalism as a property investor, as the insurance companies that are billion dollar risk insurers will only insure events that are actual accidents. They will investigate as to whether or not you forfilled your policy requirements and provided a fit and safe dwelling for your tenants to live in.
Gone are the days of just “getting in some tenants”. It should be run like a business to ensure its a well maintained house fit for tenants and complies with tenancy laws. Leaving that balcony railing with some termite damage might not seem like a big deal. However who would be sued if your tenant fell off the balcony because of that lack of maintenance? I’m sure you would also now be thinking about how thorough your managers are? Also some insurers require regular inspections as to maintain the required level of maintenance.
Personal Insurance is not everyone’s cup of tea however if passing on debt free assets to your siblings, next of kin or desired charity is a priority on your unfortunate passing then you will require personal insurance.
A burden many face is being laden with their next of kin debt upon their untimely death or passing. Having debt is sometimes essential to buying investment property however passing this on to an unready sibling or family member could be a horrifying ordeal.
Furthermore most children would not know if their parents investment property insurance covers the full amount of debt owing they could inherit a free hold property portfolio.
Personal insurance usually covers two things.
-Life, Trauma and TPD Cover
Life, Trauma and TPD cover is about insurance covering accidents/circumstances which cause death (life cover), a serious health issue like cancer and illnesses that impede your ability to work for a certain time (trauma cover) or a serious impairment that would take away your ability to ever work again (TPD cover).
These all are usually paid out by a lump sum amount.
Income Protection cover is a cash flow insurance to cover the cost your daily to day outgoings including property costs.
Most would view this as essential if you require your regular income to pay the bills etc.
Living without your income could be a dire situation and the last thing you want is to start selling up your assets to pay short-term bills.
This sort of cover is by regular payments for a predetermined time period with the intention of you recovering and retaining your income.
In conclusion insurance is now a necessary step and we have to accept the cost. Its an important part of us for-filling our obligations to help in building a secure property portfolio. Investment property insurance is vital for risk management.