Buy-to-let insurance is not just home insurance. There is more to it.
Insurance has been a bit of minefield for few, and few, have a lot of questions and confusions.
Now:
If you don’t purchase correct Buy-to-let insurance, you will be at a loss if you ever have to claim.
Having worked in insurance for nearly five years developing software for insurance providers for a different type of insurance, I have some insight into how the system works.
Managing a property business comes with the responsibility of insuring with appropriate insurance policies.
With recent natural calamities of storm Ciara, Storm Dennis and flooding that came with it, probably this article may provide some insights into how Buy-to-let insurance works.
If you are not careful, one mishap like vandalism, fire, flood earthquake can wipe out your property business.
So:
As a landlord, what insurance should have in place for a property?
Let’s understand a bit deep into the world of insurance and how it works.
What Is Insurance?
According to Dictionary.com, Insurance is an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for a payment of a specified premium.
How Is The Insurance Premium Calculated?
- Underwriters who back insurance providers would have created some risk questions, and factors and formula’s for premium calculation.
- The insurance provider would ask few questions to asses the risk of the property.
- Each answer you provide would have a factor and a formula to give out a premium.
What Is Insurance Cover?
An insurance policy could have several insurance covers. E.g. accidental damage cover, legal cover etc.
Insurance cover can be treated as different addons that of the insurance policy that you are buying.
Now:
Having a high-level understanding of insurances, let us dig deep into Buy-to-let insurances.
Is Buy-to-let Insurance A Legal Requirement?
There is no legal obligation for the landlord to have Buy-to-let insurance.
But:
It will protect you as a landlord and the tenant.
It is a requirement by the mortgage lender as well to have the required cover for rebuild costs if anything was to happen to the property.
When Do I Need Them?
When buying, once you exchange contracts on the property, you are legally required to complete.
It is better to have a minimum of buildings insurance in place before exchanging on the property so that the property is covered.
If you are selling property, you are responsible for the property until the sale completes.
So it is better to keep your insurance cover until the sale completes.
What Types Of Insurance Cover Do I Need?
Buildings Insurance:
Covers cost of rebuilding the property if it is damaged or destroyed.
If you are thinking of buying the property with a mortgage, it is usually compulsory before lending.
Most Buildings Insurance covers your property, including structure, pipes, cables and drains against the following risks:
- fire
- aircraft or things falling from them
- lightning
- subsidence, heave and landslip
- explosion
- falling trees or branches
- earthquake
- impact by vehicles or animals
- theft
- breakage or collapse of aerials
- riot and malicious persons
- escape of water from tanks or pipes
- storm and flood; and
- escape of oil from fixed heating installations.
You could buy additional extensions based on your specific needs, but please consult your insurance provider.
Household Contents Insurance:
Home contents insurance covers you against loss, theft or damage to your personal and home possessions.
As a landlord, if your property is fully or partly furnished, you may want to insure any damage to carpets, furniture or any white goods.
Landlord contents insurance will only cover landlords contents and not those of tenants.
Public Liability Insurance:
If public e.g. person walking on the road gets hurt due to a roof tile, or tenant getting hurt due to problem in the property, the landlord can be sued.
Employers liability insurance:
If you employ anyone to help with your rental property, you are legally obliged to take employers liability insurance. Failure to do so could result in heavy fines.
Loss of rent:
Tenants circumstances can change quickly, and you need to be able to respond. If the property is uninhabited for a while, buy-to-let insurance could cover you for loss of rent.
Legal cover:
Similar to liability cover, this option factors in potential disputes with tenants. It could pay for defence costs in the event of any legal action taken against a landlord.
Landlord Emergency Cover:
Burst pipes, leaks and break-ins are most potential emergencies of letting out a property. Emergency cover and provide round the clock access to tradespeople to attend the issue immediately and repair or provide advice.
Empty Property Insurance:
Protects your rental property even when it’s vacant, for example, when you complete on a property and you have to do refurbishment before your tenants move in or between lets.
While your house is empty, you may have to do certain things for your cover to remain valid, such as making regular checks on the property.
Alternative Accommodation Insurance:
If you’re contractually obliged to provide alternative accommodation if your property becomes uninhabitable, alternative accommodation insurance will cover this cost. For this cover to payout, the property must be uninhabitable because of a specified and insured event.
What Factors Will Affect Pricing?
There are quite a few factors that will affect the pricing of insurance for your property.
Risk questions: Risk questions are the questions that the insurance provider asks to calculate the insurance premium like:
Security: Do you have the best locks on doors and windows and high-quality alarms?
Postcode: Insurers use postcodes to retrieve information like crime rate etc. to determine premium.
Flood risk: Properties close to rivers or right next to the coast at sea level can be at higher risk of flooding, which means a higher premium.
Subsidence: Structural damage to your property can be caused due to subsidence, resulting in cracked walls, ceilings and floors. Some insurers may refuse to insure a house or premium may be very expensive.
Claims history: Claims history is an indication if you are highly like to make a claim, even though your previous claim maybe for good reasons.
Rebuild value: Estimated rebuild cost, if the property were to collapse due to earthquake or subsidence.
Excess: An excess is an agreed amount of money that you pay if you make a claim. The lower the excess the higher the premium will be.
How To Systematise Buy To Let Insurances?
- Keep the list of answers for each property in the cloud, so if ever you have to change insurance providers you don’t have to search for the details.
- Do you want to pay an annual premium or set direct debit? Choose what works for you and apply. We started to pay annually as there is less overhead in accounting.
- Insurance is a cost to the business, hence can be taken off as an expense. Ensure you add it to your accounts even if you are own properties privately.
- Use price-comparison sites to get good deals.
- Add renewal dates to your property calendar so that you don’t miss out or lose out on finding good deals.
- Consider portfolio insurance if you have more than 5 properties. It may work out cheaper.
Here is the thing:
For a simple factor like “Rebuild Value”, if you go ahead with what the default value is on the insurance product then you may have a cover which is £21 as opposed to £12 if you provide a proper value.
Add that over a year i.e. 12 months you are talking about £108 and over a portfolio of 10 properties its close to £1000.
Try this:
Call your insurance provider and provide the correct rebuild value and see how much difference can it make on your property during renewal.
Conclusion
I’m not an insurance consultant or a tax accountant. Legalities and regulations keep changing around insurances and taxation. Please consult your insurance provider or tax accountant to get up to date information about them.
As Sudheer and I always say, be on the right side of the law. It is the only way to do business in the long term. Please don’t rush in for short term gains.
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