Looking after your investment property involves more than just screening tenants and repaying the mortgage. Sarah Megginson investigates how various insurance products can help guard your investments - and your financial future...
As a landlord, you need to ensure that your investments are protected against disasters.
Landlords insurance is an absolute must. For less than a dollar a day, it protects investors against malicious and unreliable tenants, and provides landlords with millions of dollars in liability insurance if a tenant or their guest is injured while on the property. Carolyn Majda, marketing and operations manager with Terri Scheer Insurance Brokers, says there are varying levels of cover available, depending on the property type. She says many products provide cover for loss of rent, should a tenant do a runner, or if the tenant maliciously damages the property and you lose rental income while it is being repaired. Majda defines malicious damage as 'deliberate and wilful damage'. 'Not all policies cover malicious damage and loss of rent, so it's very important to look at the policy wordings and make sure you're covered,' Majda warns.
There are certain circumstances where landlords insurance would be void, but this comes down to the duty of disclosure, she explains. 'As long as the landlord honestly answers all the questions that we ask, there shouldn't be a problem.' She warns that a claim 'could be declined if you've answered dishonestly'. The maximum payout for loss of rent depends on its cause, but Majda says claims typically range from a few weeks to a full 52 weeks' rent. She adds that the annual premium is often around or less than the cost of one week's rent, so it's a relatively inexpensive investment that enables you to receive protection and coverage. And it's tax deductible.
Worst case scenario:
Your tenant complains that a few kitchen tiles have broken, and you organise a repairman to fix it later that week. In the meantime, the tenant trips on a broken tile and sustains a broken rib and other injuries. They sue you for negligence, loss of income and damages: you're out of pocket $200,000.
With insurance Landlord policies generally have legal liability coverage of $10m-20m.
Building and contents insurance
Building and contents insurance provides landlords with protection against natural disasters such as tsunami, fire, floods, storms and earthquakes. Policies generally provide coverage to rebuild the property and replace fixtures and fittings such as air-conditioning units, washing machines and freestanding stoves. Lyndell Fraser, executive general manager - Direct Personal Insurance with GIO Insurance, says it is important for investors to have building and contents insurance 'for a number of reasons'. 'Because they're relying on their investment property to generate income, investors need to allow for additional factors,' Fraser explains. 'It is a substantial asset, and needs protection against fire, storm events and the like. It's not only the property that needs protecting. Investors need to consider what impact loss of rent will have on their investment.'
Landlords should shop around and seek the most suitable type and level of protection for their property, Fraser says. She warns that investors should check the fine print to ensure the coverage is adequate.
'Say you've got a property and it is substantially damaged in storm event. If you had it insured for $300,000, but there's a spike in building costs, there's a risk you could have less cover than you'll need to rebuild,' she explains.
'Our policy gives a safety net protection of up to 25% of the home sum insured, so in that instance, you would have access to up to $375,000 to rebuild the property.' Fraser says that many owners of rental apartments and townhouses fail to realise that they need to arrange individual contents insurance, on top of the building insurance that is organised through the owners corporation. 'You need to organise additional insurance, and we've found that there is a major misunderstanding about that. You have strata coverage to protect the building, but you also need to cover yourself for things like basic furnishings, fixtures and fittings.'
Fraser also warns that strata coverage may only cover the original condition of the building, so if you have renovated and you don't have additional insurance, 'you would run the risk of being short'. 'That's why we've got things like the safety cover, so if a property is underinsured, then we'll make sure the landlord is protected,' Fraser says. 'It's really about helping people protect their cash flow.'
Worst case scenario:
A major storm hits and your property is severely damaged. Parts of the roof are ripped off, windows are smashed and the front door is broken. Your tenants can't live there until it is repaired, meaning your rental income ceases.
You will be out of pocket tens ofthousands of dollars - potentially even
hundreds of thousands of dollars - to cover the repairs. 'The real concern that people without insurance put at risk is retaining the property,' Fraser warns. 'If they can't get rental income and they haven't got the cash flow to rebuild the property and service the mortgage, they are putting their assets at risk.' If the debt burden is too high to manage, this could lead to bankruptcy.
All repairs and reconstruction will be covered, plus a payout for rental income lost during the rebuilding period.
Policy premiums will vary immensely, depending on variable factors, such as:
The year the property was built
• Property type - house, unit,villa, townhouse
• Size and structure
• Quality of finishes
• Types of inclusions, including furniture and whitegoods
A typical policy will cost $400-500 per annum, but Fraser stresses that this is highly dependent on the variables listed above.
Source: GIO Insurance. Current as at 18/10/07
Life insurance and income protection
Life insurance provides insured persons, or their estate, with a predetermined lump sum payout in the event of death or major personal injury. This is important for investors, as it ensures that their financial obligations will be met without placing a financial burden on their family members.
There are three types available:
• Life insurance generally provides a lump sum payment in the event of death, or on diagnosis of a terminal illness where death is likely to occur within 12 months
• Personal injury/critical illness cover pays a lump sum if you suffer sickness, injury or major physical impairment that means you are unlikely to be able to work again
• Income protection provides a regular monthly income if you become disabled due to sickness or injury and are unable to work. It can also be available as a lump sum in the event that you suffer an illness such as cancer, heart attack, MS Note that coverage may be voided if the condition results from a selfinflicted injury.
Jonathan Poole, CEO of Allianz Australia Life Insurance, says that over half of the adult population doesn't have adequate life insurance coverage, leaving their loved ones exposed to massive amounts of debt. 'We know that six in 10 people with dependent children simply do not have enough life insurance to look after their families if something happened to them,' Poole says. The primary reason for this, he believes, is because life insurance policies are perceived as being 'expensive and too complex'. 'The industry has perpetuated these problems with high commissions and confusing policy wording,' Poole admits. 'When you buy insurance from an adviser, generally all of your first year's premium payment goes to the adviser as commission. 'So it's no wonder Australians find life insurance expensive.' He says the process is evolving and, with several products now available, cover can be arranged by simply filling out a form online. In many cases, life insurance coverage can be arranged through your superannuation fund at no additional cost. For more information, speak to your fund provider, financial adviser or accountant.
Worst case scenario:
You pass away. Your assets and liabilities, including your investment properties, transfer as per your will.
In many instances, family members are burdened by the additional financial responsibilities and are forced to sell the properties to pay outstanding debts.
Life insurance payouts range from $50,000-500,000 for personal injury and income protection claims, and from $100,000-1.25m in the event of the
insured person's death. How much?
Premiums depend on several factors:
• Age/sex of insured person
• Type of coverage (payout upon injury and/or death)
• Level of coverage (payout figure)
• Occupation/level of health of insured person
• Any applicable excess amounts
Due to this, premiums can range in price. Coverage can range from:
• $50 per month for full coverage for a professional 25-year-old female
• $205 per month for life insurance and partial personal/critical illness cover for a 50-year-old non-smoking male
• $135 per month for life cover and partial personal/critical illness cover for a 35-year-old female smoker
Title insurance provides protection to investors against loss incurred due to title and property-related defects, which are generally pre-existing and unknown to the property-buyer at the time of purchase. Cover is provided for a broad range of risks, such as:
• Non-approved structures or renovations which have been built by any previous owner of the property without the required council permits, or which do not comply with those permits
• Someone else claiming ownership of a part or all of the land by adverse possession
• Forced removal or relocation of a structure because it encroaches over an easement or onto the neighbour's property
• Outstanding rates and taxes on the property, for which the insured becomes liable as the current owner of the property
• Fraud, forgery or mistake which leads to someone else claiming an interest in the land
• Where someone else builds a structure, other than boundary walls or fences, which encroaches onto the insured's land.
Premiums are payable only once, at the time of purchase, after which time the purchaser is indemnified forever against losses. Policy premiums vary between each state and insurance provider, however, the one-off fee is generally less than $500 for properties valued at $500,000 or less. Coverage is usually offered with a liability limit equal to 200% of the purchase price of the property - meaning, if you pay $300,000 for your investment property, your insurer will provide coverage of up to $600,000. Standard premiums also offer coverage for the period between settlement and actual registration of documents, to guard against a third party interest registered on title after settlement but before registration of the insured's interest.
Worst case scenario:
You purchase an investment property and obtain a Building Certificate, which reveals that the verandah had been converted into an extra living area without council approval. Upon enquiring with the council, you are informed that there is currently an order to remediate the works.
You are forced to demolish the living space and reinstall the balcony at a cost to you of $20,000. You also lose eight weeks' worth of rental income while reverse renovations are
With title insurance
Non-approved structures or renovations which have been built by any previous owner of the property without the required council permits, or which do not comply with those
permits, are completely covered within a standard title insurance policy.