Security deposits can be difficult for renters to pay. Most landlords require tenants to pay as much as triple the rent as security against missed rent payments and damage. These deposits make it prohibitive for renters to move into some rentals, and markets that favor renters have forced landlords to reduce the required deposit amount, increasing their risk of financial loss.
Security deposit insurance offers an affordable alternative that protects the finances of tenants and landlords. This relatively new product provides a lot of benefits, and it comes with just a few drawbacks. This guide explains security deposit insurance and provides an overview of its pros and cons.
Security Deposit Insurance, Explained
Security deposit insurance is an insurance policy where the tenant pays a monthly premium, and the policy covers the cost of damage and missed rent up to the policy limit. This insurance is based on a surety bond, and the policy doesn’t protect the renter. It is designed to protect the landlord instead.
The surety bond is created when the policy is established and the tenant starts paying monthly premiums. The landlord makes a claim to the insurance company if the tenant causes damage to the property or misses rent payments and needs to be evicted. The insurance company covers the damages but then sends a bill to the tenant for the payout.
The Benefits of Security Deposit Insurance
Security deposit insurance has the potential to help both landlords and tenants financially. Here are the key benefits of these policies from all sides of the equation.
Reduced Move-In Costs for Tenants
Moving into a new rental can be extremely expensive. Tenants often must come up with the first and last month’s rent plus a security deposit, and they may also have to pay to transfer utilities to their name. Deposit insurance eliminates the need for a deposit, saving renters hundreds or even thousands in up-front payments.
Additional Financial Protection for Landlords
Traditional security deposits don’t always cover all the damage and losses created by a tenant. Security deposit insurance has the potential to cover a lot more costs, depending on the policy limit. This provides landlords with extra financial protection for their properties.
Ancillary Income Stream for Landlords
Some security deposit insurance policies provide landlords with an extra income stream. The income isn’t as much as the landlord is likely to receive if they collect security deposits, but some policies give landlords about $50 per active policy per year. They don’t have to return these funds, while in contrast, they must return security deposits if there is no damage to the rental.
Easier Management for Landlords
Managing security deposits can be cumbersome. Some states even require landlords to place the funds in a separate escrow account or a regulated financial institution. Landlords who switch to security deposit insurance don’t have to worry about collecting security deposits, cashing checks, and maintaining special accounts.
Ability to File Claims Before Tenants Move Out
Traditional security deposits cannot be used until the tenant moves out. Landlords, in contrast, can make claims on security deposit policies while the tenant still occupies the premises. This can be especially helpful in places with long eviction processes, causing the landlord to suffer losses before getting the tenant to move out.
Enhanced Ability to Market Properties in Competitive Environments
Security deposit insurance can help landlords make their properties more competitive without forcing them to sacrifice any financial security. Tenants are more likely to move into a property with a lower security deposit than one with a more expensive deposit requirement if all other factors are the same.
These policies reduce move-in costs for tenants while increasing financial security for landlords. They are not bound by the same limits that apply to security deposits. Landlords may only be able to accept security deposits equal to a month’s rent in some states, but the policy limit for the security deposit insurance may be a lot higher.
Drawbacks of Deposit Security Insurance
No financial product is ever perfect, and there are a few drawbacks to deposit security insurance. Landlords and renters should carefully consider the following before turning to this deposit alternative.
Claims Aren’t Guaranteed
A benefit of security deposit insurance is that the landlord does not have to rely on the tenant to pay for damages exceeding the security deposit amount. The landlord, on the other hand, does have to make sure the insurance company approves the claim. Claims are not guaranteed. Tenants also have the right to submit photos or other documents to the insurance carrier to explain their side of the story.
Time and Cost of Implementing Changes
Landlords will have to update their leases to reflect the shift from a security deposit to an insurance approach. They may also have to spend time educating tenants about this product.
Potential for Higher Long-Term Costs for Tenants
A tenant only has to pay a security deposit once, but they have to pay security deposit insurance every month. This arrangement reduces upfront costs drastically for tenants, but it may cost them more in the long run. A tenant with a $20 a month policy, for example, will have paid $1,200 in premiums over five years. This is more than an original deposit that would likely have been closer to $1,000. Some policies offer discounts on renewed leases to prevent this from happening.
No Refunds for Tenants
Tenants who pay all the rent and don’t cause damage can get a refund of their security deposit, but they cannot get their security deposit insurance payments refunded. This is another factor that can represent additional costs for tenants.
The drawbacks to security deposit insurance for landlords are not that pervasive. The risk of an insurer rejecting a claim, for example, is not significant if the landlord chooses a reputable insurance carrier and is making a legitimate claim.
Contact Rent Safe Today to Streamline the Application and Screening Process
A security deposit and security deposit insurance work as safeguards against damage and losses caused by tenants, but it’s also important financially for landlords to vet prospective tenants as carefully as possible.
Rent Safe gives you the tools you need to do high-quality due diligence on rental applicants. It facilitates online rental applications and helps you perform background, credit, criminal, and other checks on your tenants, all through an innovative online portal. Contact us at Rent Safe today to learn more.