Rent protection insurance, also known as rent guarantee insurance, is a specialist insurance product designed for landlords that helps them to protect their rental income in the event that a tenant can’t or won’t pay. Even the most well-meaning tenant can find themselves in a difficult position where they may struggle to pay their rent – whether it be through redundancy, illness or any other factor that is out of their control. Many landlords rely on their rental income to stay financially stable, and especially for Buy To Let landlords who have monthly mortgage payments to worry about, a drop in their expected rental income can cause real problems.
Rent Protection Insurance can be taken out by a landlord to ensure that their rental income can be recouped in the event that their tenants can’t or won’t pay. Landlords pay a small monthly fee for the insurance policy and can make a claim to their insurance provider once the tenant has failed to pay a fixed minimum amount of rent (usually the equivalent of one month’s rent).
What Does Rent Protection Insurance Cover?
Generally speaking, rent protection insurance will cover the cost of any unpaid rent owed to the landlord when a tenant fails to pay. However, the exact level of cover and any additional extras will depend on the exact rent guarantee insurance policy that you choose.
Most rent protection insurance policies will also include legal expenses cover and eviction services (read more here: Does Rent Guarantee Insurance Cover Evictions | TheHouseShop Blog). Some of the better policies available in the market will also offer full or part rent coverage for at least the first 2 months after you have successfully evicted a tenant, to allow you time to find a new tenant without losing out on your rental income.
You will also need to decide how long you want your rent protection insurance to run for – most providers will offer either a 6 month or 12-month policy.
How Does Rent Protection Insurance Work?
When a landlord takes out a rent protection or rent guarantee insurance policy, the insurance provider agrees to cover the cost of unpaid rent in the event that the tenant can’t or won’t pay.
For a landlord to take out a rent protection insurance policy, there are a number of eligibility criteria for the tenancy that need to be met before the insurance provider will agree to cover the rental income. These eligibility criteria will change from policy to policy and from provider to provider, so it’s important to read the small print and make sure you are suitable for the policy before you waste any time going through the application process.
What are the Eligibility Criteria for Rent Protection Insurance?
Broadly speaking, these are some of the eligibility criteria you will be expected to meet before you can successfully take out a rent protection insurance policy:
- All tenants living in the property and named on the AST tenancy agreement must have passed a credit check showing no bankruptcies, IVA’s or CCJs in the last 3 years (read more here: Do You Need Tenant References to Take Out Rent Protection Insurance?)
- All tenants must be aged 18 or over
- All tenants must be living in the property for residential purposes
- You must have a valid landlord buildings insurance policy for the duration of the policy (standard home insurance will not be satisfactory)
- You must have a valid written tenancy agreement, signed by bother parties, covering the full duration of the policy
- Your tenants must not already be in rent arrears at the time when you take out the policy
Once you have proven you can meet the eligibility criteria for your rent guarantee or rent protection insurance policy, you will need to finalise the details of your policy. The insurance provider will usually take you through all the important information about your policy along with the standard terms and conditions. Once your policy has been confirmed, you should receive a policy overview document containing all the important information about your policy and details on how to make a claim should your tenants stop paying.
How to Make a Claim on Rent Protection Insurance
Before you can make a claim on your rent protection insurance policy, you will need to be able to prove that your tenant has failed to pay at least one month’s rent (this figure may change depending on the exact policy you choose). In most cases, you will also need to be able to prove that you have sent at least one message to the tenant reminding them about the overdue rent and requesting that they make payment.
Once you’ve submitted your claim to your insurance provider they will review the paperwork and either accept or reject your claim. Once your claim has been accepted, your insurance provider will pay you any unpaid rent and, in most cases, will start eviction proceedings to remove the tenant from the property if they are still refusing to pay.
Rent protection insurance is a great way to safeguard your rental income and avoid getting into trouble should your tenants find themselves in financial difficulty. Research shows that UK landlords have roughly a 1 in 10 chance of experiencing problems with tenants defaulting on rent payments, and landlords are losing millions and millions of pounds to rent arrears each year. Rent protection insurance can help you safeguard your rental income and ensure that you don’t end up out of pocket.
It is important to remember though that your insurance provider won’t be able to cover a missed rent payment as soon as it happens. In most cases you will have to wait roughly 30 days after your tenant misses a payment before you actually receive the insurance payment from your provider. Therefore, you will need to make sure that you have sufficient funds to cover your costs for 1-2 months if your tenants stop paying – even if you have rent protection insurance in place.
Read more about the claims process for rent guarantee insurance here: How to Make a Claim with Rent Protection Insurance | TheHouseShop Blog
How long does rent protection insurance last?
Most insurance providers will offer a choice between either 6 months or 12 months cover for their rent protection or rent guarantee insurance policies. You may be able to secure a longer policy duration, but you would need to negotiate this with your specific provider.
Does Rent Protection Insurance Cover Void Periods?
In most cases, rent protection insurance will only pay out for time when your property is unoccupied if it is as a result of an eviction process. Rent Protection Insurance is designed to cover your costs and help you to recoup your losses if your tenants fail to pay their rent – not if you can’t find tenants for your property.
Some rent guarantee or rent protection policies will offer post-eviction void cover, but this will normally only cover part of the rental income and will only pay out for a fixed period of time after eviction. For example, TheHouseShop’s Rent Protection Insurance will cover you for 75% of the rent for up to 2 months after successful eviction of your tenants – helping you to keep costs down while you look for a new tenant.
Void periods can be extremely costly for landlords and you should do everything you can to minimise the amount of time your property sits empty. Even in the busy London rental market, letting agents claim that it typically takes 20 days to replace an old tenant with a new one after the property becomes vacant. This means you will lose out on almost 3 weeks worth of rental income!!! This article from EzyTrac has some more useful info about void periods and how much they could cost you as a landlord: How Much Will Tenancy Voids Cost the Buy To Let Landlord?
One of the best way to avoid void periods is to maintain good channels of communication with your tenants so that you get fair warning before they plan to leave the property, and make sure that you have a fast and effective way to find new tenants when the time comes. Even if you use a letting agent to find tenants for your property, there is no harm in casting the net as wide as possible and making use of some of the DIY and free-to-list tenant find platforms – if it helps you find a tenant faster and cut down on costly void time then it’s well worth it!
Legal for Landlords take a more in-depth look at what you can do to minimise void periods in their helpful article here: Void Periods: How You Can Avoid Them | Legal for Landlords
Can I get Rent Protection Insurance if my tenants are already in arrears?
Unfortunately, it is highly unlikely that an insurance provider will be able to offer you a rent guarantee insurance policy if your tenants are already in arrears. Even if you do manage to find an insurer who will offer you a rent protection policy, you usually won’t be able to make a claim in the first 90 days after your policy start date – so you won’t be able to recoup any of your losses. Even if you wait until the 90 day no-claim period has passed, you won’t be able to back-date your claim to cover the existing arrears. While rent protection insurance won’t be able to help you recover any existing unpaid rent owed to you, it would be sensible to look at taking out a rent guarantee insurance policy as soon as you take on new tenants to avoid ending up in the same position in the future.
Rent Protection Insurance is meant to be used as exactly what it says on the tin – an insurance policy in case things go wrong with your tenancy at some point in the future. It is not meant to help you claim back money after your tenants have already fallen into arrears. It may seem counter-intuitive to think about purchasing a Rent Guarantee Insurance product when everything is going well with your tenants, but even the best tenants can find themselves falling into financial difficulty through no fault of their own. This is why it is well worth looking at rent protection policy options as soon as you take on new tenants – even if you are convinced they can afford to pay the rent each month.
Is Rent Protection Insurance Tax Deductible?
In short, yes! Landlords will be able to claim back the cost of their rental protection insurance policy against their rental income when the time comes to file their tax return. This makes it even easier to offset the cost of protecting your rental income.
When you think about the fact that without an insurance policy in place, you could stand to lose thousands of pounds in rental income, plus the additional costs, time and stress of going through the courts to seek eviction of the tenant – a small monthly fee that you can offset against your rental income seems like a very small price to pay for financial peace of mind.
Rent Protection Insurance Facts and Figures
- Non-payment of rent was an issue for 67% of landlords who have experienced problems with a tenancy, according to a 2017 survey by HomeLet (View the full research here: What are Landlord’s Biggest Concerns for 2017? | HomeLet)
- The Government’s English Housing Survey found that 9% of tenants in the Private Rented Sector are in, or have experienced, rent arrears in the past 12 months. This number increases to 25% of tenants in the Social Rented Sector. This means that as a private landlord, you have a 1 in 10 chance that your tenant will experience financial difficulty and fail to pay rent or fall into rent arrears.
- One third of landlords have experienced a problem with rent collection, according to the National Landlords Association
- The Office of National Statistics shows that over 150,000 landlords in England and Wales went to county courts to seek repossession of their property from tenants, with 35% of these cases resulting in a completed eviction and repossession of the property by county court bailiffs.
- Did you know: if a tenant falls behind with rent payments it can take 3-4 months before you can start eviction proceedings and it is highly unlikely that you will be able to recover any of the unpaid rent even after successfully evicting the tenant.
- Estimates show that the average cost to a landlord of 3 month’s rent arrears and the legal costs for evicting the tenant will total £5,000 – a significant sum of money for any landlord! Read more about the true costs of being a landlord here: The Financial Costs of Being a Landlord | Property Investment Project
Important – Is Rent Protection Insurance the Same as Guaranteed Rent?
There is an important distinction to make here between rent protection or rent guarantee insurance and a guaranteed rent scheme. With rent protection insurance, the landlord will need to make a claim to their insurance provider once the tenant has met a fixed minimum for the amount of rent they have in arrears. Once the tenant has met this fixed minimum, the landlord can file a claim to recoup the lost income. With a guaranteed rent scheme on the other hand, the landlord effectively agrees to rent their property to the scheme provider, and it is the provider that will pay the landlord their rental income each month. It is then up to the scheme provider to sub-let the property to tenants and collect rent from those tenants. This means that the landlord will receive their rent on the due date each month, regardless of whether the actual tenant has paid or not. The downside with this arrangement is that the scheme provider will sub-let the property for a higher rental amount than the figure they are paying to the landlord each month (this is how they make their money). This means that as a landlord you could be losing out on valuable rental income.