Well, let's start with an example of how insurance works:

Life is filled with risks. You might fall off your skateboard and break an arm. Or, maybe you crash your car into a wall and it is no longer drivable. The idea of insurance (and/or insurance policies) is to lower, or take away, the risk of financial loss.

In this scenario, your health insurance would help pay for the cost of the hospital bill from the skateboarding mishap, while your auto insurance would cover the damage to your car.

So, What Is Renters Insurance?

Renters insurance helps replace your personal items that you keep at your residence if they are damaged, lost or stolen.

• Some renters insurance will even pay for your items if they are stolen when they're not in your place. For instance, if your computer is stolen at school or at work.
• Some renters insurance will cover expenses if a person visiting you is injured in your apartment and sues you.

Be sure you know what is covered under your renter's insurance policy!

Last month, one member of the FoolProof team accidentally dropped a glass of water onto his brand new MacBook. The Apple warranty—like most (if not all) computer manufacturers' warranties—does not cover water damage.

This specific person (who shall remain nameless) would have been out about $2,000 if it wasn't for insurance. Luckily, his renters insurance covered the full cost of the MacBook. Phew!

How Does Renters Insurance Work?

Typically, you would pay a monthly, semi-annual or yearly premium to the insurance provider for this type of coverage.

There is normally a "deductible" on any insurance policy. The "deductible" is the amount you have to cover in the occurrence of an event, or the portion of the loss that is to be paid by the insured (you) before any claim benefits can be paid by the insurance provider.

For instance, in Martin's MacBook case (oops, slipped his name!), he dropped water on his $2,000 computer and ruined it. His deductible was $500, so his insurance only paid out $1,500.

What's the Smart Way to Buy Renters Insurance?

Here's a start:

• List the value of all items you'll be keeping at your (new) place.
• Research different renters insurance policies from various providers
• See if any of the policies would pay off if your items are lost.
• Pick the one that covers most of your items and fits in your budget.
• Choose the one that best fits your needs before you sign an agreement.

Important Note

What's the most important thing to look at if you're going to get renters insurance?

Consider adding the replacement cost endorsement to the policy. This ensures that the insured (you) will receive the money to go out and buy the damaged item new, rather than receiving the depreciated value of the item at the time of the loss.

Should most people get renters insurance? Probably, if the cost is in your budget, and if you have items that would cost a lot to repair or replace.

FoolProof's Biggest Tip

Brush up on your insurance intelligence. Some companies that sell renters insurance have more fine print than your credit card statement, and some of the companies may be untrustworthy. Work through our "Parachute Required" interactive FoolProof Solo lesson on insurance to learn the tough details.

Cheers, Will