The Complete Guide To Security Deposit Insurance With Pros And Cons

For renters, finding the money to rent a property can be very difficult.

They need to pay things like monthly rent, renters insurance, property taxes, and a security deposit.

Most of these do not have high upfront costs and are paid in small increments every month. That is, except for the security deposit.

The security deposit can be a hefty sum that is due at the beginning of a renter's tenancy. This is typically a large amount of money and can be difficult for some tenants to pay.

Luckily for them, there is a security deposit alternative.

In this guide, we will be going over what security deposit insurance is, as well as the pros and cons for both renters and landlords.

To begin, let's go over the difference between a security deposit and security deposit insurance.

Security Deposits vs. Security Deposit Insurance

A traditional security deposit is a cash deposit that a new resident gives to their landlord or property manager in addition to their advance rent payments. This money is reserved to provide coverage for any unpaid rent, extensive damages, or other unexpected expenses.

There are many state laws and local laws that govern security deposits. Due to this, it is important that landlords and property managers thoroughly learn the laws regarding security deposits. If you want to learn more about your specific state, be sure to visit DoorLoop's Laws Page for more information.

Nowadays, however, raising money for security deposits is becoming increasingly difficult. That is when they turn to one of the security deposit alternatives, security deposit insurance.

What is Security Deposit Insurance?

A security deposit insurance policy is essentially an insurance policy that protects landlords from unpaid rent and damages, similar to a normal security deposit.

One of the key differences between the two is that the insurance policy is not refunded at the end of the tenancy. This is unlike cash deposits that are typically refunded once a tenant moves out.

Another one of the key differences is that the tenant can choose how to pay the insurance. Most insurance companies offer a lump deposit option or a monthly payment option.

Compared to the cost of a security deposit, the monthly premium is very low. This makes security deposit insurance a good choice for those struggling to save up enough money for the entire deposit.

When a tenant has this kind of insurance, the landlord files claims for things like lost rent or damages to the appropriate party, following insurance companies policies. It must be warned, however, that some companies pursue the tenant for the claims paid to the landlords.

So, now that we know all about the differences between a traditional security deposit and security deposit insurance, let's go over some of the pros and cons for both the tenant and the landlord.

Security Deposit Insurance: Pros and Cons

Below we will be going over some of the pros and cons of security deposit insurance. To begin, we will be going over both from the tenant's perspective.

Security Deposit Insurance for Tenants

In this section, we will be going over the pros and cons of security deposit insurance products for tenants.

Pro: Makes Housing More Accessible

Since this insurance policy means that tenants will not have to pay a large sum of money at the beginning of the tenancy, they can move into a property faster than normal. This is because they do not have to worry about the thousands of dollars that a normal deposit typically costs.

It is important to note, however, that some landlords or property managers do not accept insurance. For this reason, prospective tenants must check with the appropriate party to make sure that they can purchase this kind of insurance policy.

Pro: Inexpensive Alternative To Security Deposit

As mentioned before, a security deposit insurance policy is an inexpensive alternative to a regular security deposit. This is very beneficial for those tenants who may be strapped for cash and not able to pay the entire deposit.

Depending on the provider, an insurance policy can cost anywhere from $5 to $50 a month. This is relatively affordable compared to the thousands of dollars security deposits can cost.

Pro: Insurance Company Makes Decisions

With regular security deposits, the landlord typically makes decisions regarding the security deposit. These decisions, however, are regulated by the same state laws that regulate all other landlord-tenant relations.

With security deposit insurance, the tenant can submit photos and videos to the provider. By doing this, the provider is the one who has the last word when a claim has been filed.

Con: Not All Insurance Providers Are Reliable

One of the most concerning cons of going with security deposit insurance is reliability. Since not all providers are the same, it is important that the renter do their research and make an educated decision.

One of the worst things that can happen is when a surety company overcharges for premiums but does not deliver on its promises. For example, an insurance company can promise dozens of benefits for purchasing the insurance, and charge a very high premium, only to later charge the tenant for actually using the insurance.

Con: May Become Expensive Depending On Situation

Depending on the situation of the renter, security deposit insurance could actually become very expensive. This typically only happens in very expensive markets. It also only happens when the renter is very long-term.

When this is the case, the cost of the insurance adds up and can actually end up being more expensive than the actual security deposit. It is important to check all of your options and choose whichever one is more cost-effective for you.

Con: Different Expectations

Since surety bonds are not governed by the same laws as security deposits, different expectations exist. This could mean that the tenant has to keep the property in better conditions, as the provider may dispute minor wear and tear.

So, now that we know about the pros and cons on the tenant's side, let's look at the pros and cons for the landlords.

Security Deposit Insurance for Landlords

In this section, we will be going over the pros and cons of security deposit insurance for landlords.

Pro: Covers Unpaid Rent

One of the most beneficial characteristics of deposit insurance is that it covers unpaid rent. This means that if the tenant fails to pay their rent for a number of months, the insurance could cover it.

Although some states allow landlords to cover these missed rent payments with the security deposit, some don't. In these states, it may be a good idea for landlords to look into insurance options.

Pro: Property Manager Can Make Claim With Tenant Still In Property

With a regular security deposit, the landlord must wait until the tenant moves out to make a claim. However, with an insurance policy, the property manager can make a claim at any time during the tenancy.

Pro: Can Help Property Manager Advertise Property

Another one of the benefits of offering security deposit insurance is that it can help distinguish a property from others. The reason for this is that offering insurance as an option can attract younger renters with less money saved up.

Con: Not All Claims Will Be Accepted

One of the cons when landlords use insurance is that not all claims will be accepted. Since each claim is evaluated at the time of loss to determine coverage, they are not necessarily guaranteed.

This means that some things a landlord claims will not be covered. For instance, normal wear and tear will not be covered by insurance.

Con: Time-Consuming

Another one of the cons of offering insurance is that it could be very time-consuming for landlords. At the beginning of the tenancy, it is the landlord's responsibility to educate the tenant on the differences between their options.

Also, when the landlord wants to make a claim, it can potentially take weeks, or even months, to get paid. This is because the claim is going through an insurance company, which can be unpredictable at times.