If you've known many renters, you've heard the war stories.
One of the worst stories involved a friend of mine. She was renting in an apartment complex that was old but well maintained. Her place was nice, the fixtures were a little dated but not too bad.
One day, she noticed a little discoloration in the ceiling of her bathroom. Eh, it's not her place so she just ignores it. I bet you can guess what happened next. One day, like months later, the ceiling collapsed and it's flooding into her apartment.
She was really lucky she wasn't brushing her teeth when it fell!
But there's a fascinating thing that happens anytime she brings up this story. There is almost always another person who has experienced something similar.
(JIM: Personally, I know at least two people who have experienced this type of flooding in their apartment.)
We all know that when we buy a house, we need homeowner's insurance. If you have a mortgage, homeowner's insurance is required.
But when you rent, renter's insurance is crucial. It's also really cheap. There's a new startup, Lemonade, that wants to help make it even easier and they're doing it in an innovative way that works for social good too.
Who is Lemonade?
Lemonade is a private insurance company that was founded in 2015. They sell insurance for renters, homeowners, and condos or coops. Lemonade also offers add-on coverage (riders) for valuable items, earthquakes, and the accidental loss of property.
But Lemonade isn't just a fancy new way to price compare insurance – they do it differently.
Lemonade sells policies directly to consumers, cutting out the middleman. Just like other insurers, they calculate your premiums based on your history, credit, and the nature of what you want to be insured. However, their prices are tough to beat. Their renter's policies start at $5/mo and homeowner's policies start at $25/mo.
Unlike other insurance companies, Lemonade works on a peer-to-peer (P2P) system. With P2P insurance, everyone pools their monthly premiums together. When someone files a claim, money is taken out of the pool to cover the cost.
But Lemonade isn't unusual just because of its P2P model. The company takes a 20% cut of your premiums to cover their costs every month, and the rest of the premiums go toward insuring your group. If there's money left in the pool at the end of the year, Lemonade donates it to a charity of your group's choice.
This is in stark contrast with the traditional insurance model. In traditional insurance, the company takes your premiums and invests it. When you make your claim, they pay out of the fund they've created with the premiums. Their profits are what they make from those investments and what they don't pay out in claims. In the old model, insurance companies increase profits when they pay out less – Lemonade simply donates that amount, which removes that conflict.
A quick video about them:
(JIM: it was fun to see Dan Ariely involved!)
Over three-quarters of their customers are under age 35. Since the company was designed to appeal to Millennials and Gen Z, that isn't a surprise. Lemonade uses high tech features like digital claims and machine learning.
Is Lemonade right for you? Let's take a look at the pros and cons of this P2P insurer.
There's a lot to love about Lemonade.
Here are a few of my personal favorites:
Affordable, comprehensive coverage
Nobody wants to overpay for insurance. The great thing about Lemonade is that it's designed to minimize costs at every turn. In addition to cutting out the middleman for issuing policies, they also include some sweet discounts. Score a discount for having good credit, alarms, or smoke detectors. You can even get a discount for living close to a police or fire station.
The worry with cheap coverage is that you're SOL if something goes wrong. That isn't the case with Lemonade. The coverage is pretty comprehensive, including coverage for their “16 Perils,” like fire, smoke, theft, vandalism, water, and more. If you want more coverage for things like earthquakes, there are add-ons available to get the protection you need.
It's adjustable and transparent
I absolutely detest how the quote process works with most insurers. Fortunately, Lemonade's process is extremely transparent and easy. You can even adjust for more or less coverage when you need it through their nifty mobile app. There are zero surprises with Lemonade's fees and you always know what you're paying, what's covered, and why.
Zero Everything option
Billed as an ‘undo button' for your life, the Zero Everything option lets customers skip their deductibles when filing a claim. It means you won't have to worry about paying huge deductibles and seeing a rate hike for submitting a claim. You can use Zero Everything twice without worrying about a rate hike.
Obviously, if you don't abuse the feature, you'll be golden! You'll want to check with Lemonade's latest rules, but this feature is currently available in California, Texas, Nevada, and Illinois.
Lemonade was created for the under-35 crowd. For that reason, it was built to be mobile-first and digital. You don't have to physically go to an office or get put on hold for 30 minutes to file a claim.
In fact, Lemonade uses AI to settle claims almost instantly. You just record a video through the app explaining what happened and submit the claim. Once the claim is approved, Lemonade deposits the funds into your account. Boom, no long hold times needed.
One of the most unique (and awesome) things about Lemonade is their Giveback program. If there are remaining funds left over after paying out everyone's claims, Lemonade donates the funds to a charity of your group's choice.
The Giveback program doesn't just do good in the world. It's a way to discourage price hikes and unethical behavior. Because Lemonade only takes 20% of your premium for operating costs, they have no skin in the game of denying your claims. They don't earn less when you file claims, which means there's no conflict of interest.
They're much less likely to fight you over coverage because they have no incentive to do so, unlike traditional insurers.
Nobody's perfect, and that includes Lemonade.
Here are a few less-than-stellar cons to consider before using them as your insurer.
Insurance can be tricky, and for that reason, Lemonade is only available in select states. Right now, you can get Lemonade if you live in any state listed on their site. The great news is that Lemonade continues to expand year after year, so it's likely they'll have more reach over time.
As of November 2018, they offer renters, condo, and homeowners in New York, California, Illinois, New Jersey, Nevada, Georgia, Pennsylvania, Maryland, Arizona, Michigan, Connecticut, and Washington, D.C.
They offer renters and condo insurance in Texas and Rhode Island.
And they offer renters insurance in Iowa, Wisconsin, New Mexico, Ohio, Oregon, and Arkansas.
They continue to add additional states and policy coverage.
This is the big downside of having an AI-powered insurance company. If you need to speak with a live human, it can be a little difficult. Most communication is digital and AI robots do most of the heavy lifting. Of course, this is what helps Lemonade keep costs so low. If you value having a personal relationship with your insurer or want to chat on the phone, Lemonade might not be for you.
You might be used to bundle or multi-policy discounts from other insurers. Sadly, it doesn't look like Lemonade offers these discounts. If you're getting tons of policies and really value bundling, you might want to look elsewhere.
What's the future?
This is the big question with P2P. It's the wild west of insurance.
We're not completely sure what the landscape will look like over the long term.
I haven't seen evidence that suggests P2P is dangerous, but if you're risk-averse, you might not feel comfortable going into a relatively uncharted territory.