As a Landlord, it is important to take proper precautions to protect yourself in case you were ever to be sued. The most common forms of asset protection come from either umbrella coverage or using a business structure (most commonly an LLC). This is an important part of planning when you have rental property but unfortunately is often overlooked. Let’s take a closer look at both to understand the merits of both and how they may be able to help you.
Basics of Umbrella Policy
As the name implies umbrella insurance is a sort of catch-all that provides additional protection for the “What Ifs” that works to protect you when you reach the limits of other insurance policies like homeowners or auto. Imagine you are sued for $1 million for an accident at your rental property and your insurance coverage only goes up to $250,000. You personally would be on the hook for the remaining $750,000 ($1 million settlement – $250,000 insurance coverage). An umbrella policy however would step in and cover this additional $750,000 assuming you have enough umbrella coverage.
The great thing is that with an umbrella policy you are protected whether something happens to you personally (i.e. auto accident) as well if something happens at your rental properties. An LLC only really provide protection if something happens at the rental property. Umbrella provides great benefits for a relatively low cost. The downside is that if the claim exceeds your umbrella policy you are on the hook for the excess amount. Taking the same example from earlier, the settlement is $1 million and there is $250 insurance coverage and additionally $500,000 in umbrella. In this example you are still responsible for $250,000 ($1 million settlement – $500,000 umbrella – $250,000 insurance coverage).
Basics of an LLC
A Limited Liability Company (LLC) is designed to provide asset protection in case you were to get sued. Essentially, in a lawsuit, if something happens at a rental property any potential losses are limited to the property in the LLC. Assume the home is worth $500,000 and is the only property in the LLC. What this does is effectively separate your assets limiting the potential loss to the home worth $500,000.
An LLC helps shelter you from larger lawsuits and can provide more protection than umbrella coverage because an LLC does not have a limit, where with umbrella coverage our personal assets can be at stake for any amount above the limit. For this increased protection there are more costs. Establishing an LLC can be expensive in some states (currently $800 a year in CA) and requires more paperwork and hoops to jump through.
What is best for me?
This question is best answered by your financial planner and attorney. There are some things to consider like the number of rental properties you have and their location. If you own a single property nearby it may be easiest to just use umbrella coverage. However, if you own multiple properties, or properties in other states than an LLC or combination of LLC and umbrella coverage may be best. Remember most people choose one or the other, but you can have both forms of coverage.
FAQs
Legal Considerations and Liabilities
The legal protections that an LLC offers an owner are pretty fantastic. The separation of your business and personal assets is just not something an umbrella policy does. Instead, umbrella policies offer coverage limits that reach into the millions.
Does umbrella policy cover rental properties? ›
For rental insurance, umbrella policies cover multiple rental properties instead of specific properties. It's possible, for example, to take out a property-specific landlord insurance policy.
How much does a $5 million dollar umbrella policy cost? ›
A $5 million umbrella policy costs around $375 to $525 per year, on average. Every policyholder's umbrella insurance premium will vary based on their personal risk factors, so individuals who own more cars or properties will be more expensive to insure, as will people who are particularly likely to be sued.
What is not covered by a business umbrella policy? ›
It does not cover damage to our own property or any liability related to your business or profession. The umbrella also typically does not cover exposures that the underlying policies also do not cover.
What is the biggest disadvantage of an LLC? ›
Disadvantages of creating an LLC
- Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee. ...
- Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation. ...
- Compliance obligations.
The answer is yes--it is possible and permissible to operate multiple businesses under one umbrella LLC. Many entrepreneurs who opt to do this use what is called a "Fictitious Name Statement" or a "DBA" (also known as a "Doing Business As") to operate an additional business under a different name.
What are the disadvantages of umbrella insurance? ›
Umbrella insurance doesn't cover your own injuries or property damage — you'll need other types of coverage for that (such as health insurance or collision coverage on your auto insurance). Nor will it cover liability associated with your business unless you have a business umbrella policy rather than a personal one.
How much does a $10 million dollar umbrella policy cost? ›
| Umbrella insurance limit | Annual cost of umbrella insurance |
|---|
| $1 million | $563 |
| $2 million | $713 |
| $5 million | $933 |
| $10 million | $1,578 |
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Now, $1 million might seem like a lot, but that number could get eaten up fast during an expensive lawsuit. If you own property, drive a luxury car, have a swimming pool, serve on a board or nonprofit, or are publicly known for your success and wealth, you might want to consider more than the $1 million minimum.
Do umbrella policies cover property damage? ›
What is umbrella insurance? Umbrella insurance is extra insurance that provides protection beyond existing limits and coverages of other policies. Umbrella insurance can provide coverage for injuries, property damage, certain lawsuits, and personal liability situations.
An umbrella policy can forestall the prospect of financial ruin due to an unintentional misstep or an unforeseeable accident. You may also wish to consider increasing the liability limits on your auto or homeowners insurance policies.
Can I buy umbrella insurance separately? ›
Yes, umbrella insurance is always purchased separately. But you'll need underlying homeowners and auto insurance with substantial coverage limits.
Is umbrella liability worth it? ›
Is umbrella insurance worth it? If you have significant assets, it's worth getting an umbrella policy. The liability insurance within your auto and homeowners insurance policies might not be sufficient if you get sued for an incident such as a dog bite, car accident or accidental injury to someone else.
Why you should always have an LLC? ›
Without an LLC or other business entity, your personal assets are at risk if your business is sued for something a co-owner or employee does. An LLC's operating structure also helps to avoid conflict and misunderstandings between you and your business partners. Your business has significant risks.
What is the biggest benefit of an LLC? ›
Pros: Limited Liability: An LLC provides limited liability protection for its owners, meaning that the owners are not personally liable for the debts and liabilities of the business. This can shield personal assets from creditors and lawsuits.
What is better than an LLC? ›
Advantages of a Corporation
Corporations offer more flexibility when it comes to their excess profits. Whereas all income in an LLC flows through to the members, an S corporation is allowed to pass income and losses to its shareholders, who report taxes on an individual tax return at ordinary levels.
