Rental insurance. Is this a good buy?

Dear Mr. Tan

What are your views on the rent protection insurance for landlords?

The premium is 1.25% of the annual rent. Payout is up to 4 months when tenant absconds for a 1 year tenancy. Excess is 2 months. Thus, landlord loses 1 month of rental say $3000. and keeps the other security deposit.

The landlord pays $450 to cover $12,000

REPLY

Is it worth while to pay a premium of $450 for this insurance?

You have to calculate the frequency of claim in each year and the average amount of a claim.

Here are the expected claim cost for various claim rate

Claim rate Average claim $3,000 $6,000 $9,000 $12,000

2% $60 $120 $180 $240 4% $120 $240 $360 $480 6% $180 $360 $540 $f720

I expect the default rate to be less than 4% and the average amount of claim to be 3 months ($9000), so the expected claim cost is less than $360.

If the expected claim is $360 and the premium is $450, the premium is fairly priced as the insurance company needs the margin to pay for its expenses and to provide a modest profit.

If you expect the default rate to be 4% or higher, it is better to buy the insurance. However, if the claim rate is likely to be much lower, then the insurance is not worth while.

However, you have to pay attention to the policy conditions. You are probably requited to report to the insurance company when there is delay in the payment of rental,so that the insurance company can take action early to minimize the loss.