Landlord insurance: How to protect your investment when your income stream is cut off.
Landlord insurance has been developed to support Landlords* who need to insure their property. In the UK, Landlords need to insure their property if they are to rent or lease their property to a tenant or tenants. A landlord does not need to if the premises are unoccupied, however, they are then vulnerable for costs to the property. Additionally, it is important to note, that if a property, which the landlord takes out the insurance policy is occupied at time of inception (time of starting the insurance policy), becomes vacant, the insurance policy will typically remain in force for up to 30 days*, allowing for cleaning/ decorating and handover. After this time* the insurance company must be informed that the property is now unoccupied which is likely to incur an additional premium.
* Landlord is a person, company or legal body who owns a building, which is then leased or rented to a tenant.
* Insurance policies will vary from Insurance Company to Insurance Company, it is advisable to check this when taking out a Landlord insurance policy.
So how can a Landlord protect their investment?
Investing in property is a long term financial plan. The objective of the income of the rent is typically to help to cover the money tied up either the cost of a mortgage or loss of interest. The additional benefit of the property ownership is then to see your capital grow. When an occupied property, which has been bringing in a constant stream of income, covering your outgoings, contains a tenant who is unable to pay or if there is some large structural issues preventing the tenant to be able to use the property, thereby preventing the rent to be paid. Unless the Landlord has an insurance policy, the landlord will be left with a financial shortfall. With Landlord insurance policies, additional cover can be taken out which will insure the Landlord for the shortfall. The insurance company, for an additional premium fee, would pay the landlord for the missing rental income. The premium for this additional cover is based upon the total income amount times the maximum duration of cover (typically 12 months) times the percentage chance of it occurring (i.e. likelihood of payout). Additional rating factors based on location, administration and whether the landlord has a large portfolio or single property can also be added to the premium. Sometimes an insurance company can ask for evidence of the rental amount if it appears to be excessive or too low.
The other aspects of protecting the landlord’s investment, will be to insure the property. This insurance can be at three different levels which offer different levels of protection. Level 1 for occupied property will cover basic aspects for the landlord including protection from Lightening, Fire, Storms or the building collapsing. Further cover may be offered but will vary from insurance company to insurance company. Level 2 will often cover burst pipe damage, but this will have a limit on the cost of repairs. Level 3, the most expensive premium, will cover all aspects of the property, though again may be subject to specific criteria or limitations.
For unoccupied properties, although they have 3 levels of insurance, less is provided in the way of cover due to the fact that no one is present for the majority of the time. Furthermore, to ensure the Landlord insurance policy remains valid, there may specific terms expected, which should be discussed with your insurance broker. Some insurance companies will insist that the water is turned off at the property to prevent water damage, especially if the property is to be unoccupied for a long period (draining the system). Others may insist that it is kept on to support the heating system (to avoid burst pipes).
Finally, Landlord insurance, like domestic home insurance, obtaining cover in deemed flood areas, can be either difficult or expensive. However, some insurance companies will provide a type of Landlord insurance policy which will provide cover for the property, but not cover the flooding aspect, which could bring the cost of the insurance down.
The best approach is to read about the subject, then to seek out an insurance broker who specialises in this type of insurance, who should be more than willing to provide guidance on how to cover your property.