Umbrella Insurance For Rental Property Vs LLC: What’s Better?
A Rental Property Owner is always one step away from experiencing personal liability. It is important that you have adequate protection when expose to liabilities. You might have heard about umbrella insurance for a rental property and an LLC. These are the two different types of protection available for landlords today. But, which is better in terms of protecting you completely is our topic for today?
An Umbrella Insurance Policy and the LLC are just about the adequate thick cushions that protect landlords in case of personal liability. However, both are completely different in the sense of how these protect you. You then have to choose carefully between Umbrella Insurance For Rental Property Vs LLC.
Feeling concerned for your business? We are here to tell you what to choose between an Umbrella Insurance Vs LLC for rental property. And, what if you have either of these already? Should you need the other one too? Wait no more, we are addressing all such concerns in this article.
What is an Umbrella Insurance Policy For Rental Property?
An Umbrella Policy is an additional cover above your standard Landlord insurance policy. With an Umbrella policy, you are protected from a liability even if your standard policy cover is used to its maximum limit.
Suppose you are sued in the court and the judge ordered the compensation of $600,000 and your standard policy is worth only $300,000. Now, if in this case you have an umbrella policy say of $1 million. The claim settlement will be absorbed by the umbrella insurance policy.
Imagine not having an umbrella insurance policy in this case. Your rental property or even your personal assets will come at risk. The claim will be settled by going after the equity in your rental property. And if it isn’t enough, the judge can order for tapping into your personal assets to settle the claim.
Read: Why Landlord Insurance and Not Homeowner`s Insurance For Your Rental Property?
What is an LLC For Rental Property?
An LLC stands for Limited Liability Corporation. The LLC provides your rental property a distinct identity, separating your rental property from your personal assets. When you have your rental property owned by an LLC, it is the LLC not you that is liable in case of liability.
Suppose if a tenant got electrocuted at your rental property and he sues you for getting a permanent disability. The claimant can only go behind the assets your LLC owns and not for your personal assets if your primary policy reached its maximum liability limit.
An LLC protected you in this case and if it wasn`t for an LLC, the court can even go behind your personal assets to settle the claim.
Umbrella Insurance For Rental Property Vs LLC
The Umbrella Insurance Policy and the LLC protects the rental property owners from liabilities, but differently and one is not the alternative of the other. There is no direct comparison between the two.
Still, wondering what is the best protection for your business and want a precise answer? Keep reading this article.
“To have a better insight on what protection is best for your business, let me shed some light on how these two protect you exactly from a liability.“
How Umbrella Insurance Policy Protects From Liability?
With an umbrella policy, you buy yourself liability insurance for cases when you can get sued and your primary insurance is not enough to pay for that liability. To have an umbrella policy, you must have a primary landlord or homeowners insurance with minimum liability coverage of up to $300,000.
The minimum Umbrella Policy that you can opt for is $1 million dollars and can further purchase it for a bigger amount according to your needs.
Now if your tenant sues you for some reason, say getting his arm broken due to the slippery bathroom tiles. And, the judge awards him a compensation of $500,000. Now, first, your primary landlord insurance policy of say $300,000 will kick in. And, since it is not enough, your umbrella policy will cover the additional cost of the liability. And, in this case, you only pay the deductible amount for the primary landlord insurance policy.
Remember the Umbrella Policy protects you from liability but your claim can be denied if the liability occurs through your negligence, like continuous written requests from the tenant for changing the slippery tiles.
Read: What are the Maintenance Responsibilities of a Landlord?
How LLC Protects You From a Liability?
When you have an LLC, any liability arising due to a lawsuit is not your personal responsibility but of your LLC. This means, even if you got sued, only the assets owned by the LLC are at risk and not your personal assets.
Let’s say one of your tenants sues you and wins the lawsuit. Suppose your net worth is in millions but the LLC has only one rental property that is worth $300,000. Now even if the claimant was awarded $500,000, he will get only $300,000.
Also Read: When should You consider incorporating your Rental Business under an LLC?
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Umbrella Insurance For Rental Property Over LLC?
From the above case, you may think that it is the umbrella insurance policy that is much better in terms of protecting you from liability. As in the former case, you only paid for the deductible of your primary insurance policy and in the later case, your $300,000 rental property got exposed.
So, does an Umbrella Policy is superior to having an LLC? In the above case, yes it was. But it doesn’t mean it is always the case. And, it also doesn`t mean an LLC is useless over Umbrella Policy.
Consider this case for an example.
A 30 Apartment building catches fire due to old electrical wires that haven’t been taken care off by the landlord. The result of which is 25 people got burnt severely and the families of those sued the landlord.
In this case, the landlord has $500,000 landlord insurance and a $5 million Umbrella Policy. In the lawsuit, the judge awarded $1 Million for each person who was burnt totaling $25 million in compensation.
The landlord paid $5,000 for deductible and the combined insurance covered the $5.5 million liability. Conclusion is the landlord got a $19.5 million personal liability. And if this landlord has owned the rental in the name of LLC and has liability insurance in name of LLC, he wouldn’t have occurred to any personal liability.
Now, if you can see, the umbrella policy in this case wasn’t able to protect the landlord from a liability completely.
Also Read: Why Landlords Must Require Renter`s Insurance From Tenants?
At a Glance
- With LLC, the only assets that are at stake are those which your LLC holds. But with umbrella insurance, your personal assets are at risk too if the liability amount surpasses your policy limit.
- An LLC is both expensive to set up and cost a bomb annually. In some states, incorporation under an LLC can even cost upwards of $800 per year. Umbrella Insurance policy is an inexpensive policy. A $1M coverage with Umbrella Insurance normally costs between $150 to $300 per year.
- You can buy Umbrella Insurance Policy on top of a primary policy only, like a homeowners insurance, or an auto insurance, or a landlord insurance policy in case of rental properties.
So, Umbrella Insurance Policy Or LLC For Rental Property?
Umbrella Policy Vs LLC is simply comparing apples to oranges. And which one should you opt for completely depends upon your personal case. Even, if you should choose both, that too depends on your own. But some suggestions.
You are Fine with a Landlord Insurance and an Umbrella Policy, when
- You own a single-family rental or multifamily property with no more than 4 units.
- You are just starting out or own only 2-3 rentals with few tenants. Less no. of tenants means less liability.
- Your combined equity in rentals hasn`t exceeded $1 Million.
Get your Rental Property under an LLC too, if
- Your Portfolio has various Rental properties ranging from single-family homes, multi-family properties, and apartment buildings.
- The Combined Equity is more than $1 million in your rental properties.
- You have more than one owner owning the rental properties.
Should You Have Both the Umbrella Policy and LLC?
Having Umbrella Insurance for rental property Policy and LLC, both work hand in glove and give you strong liability protection. But as I said above, transferring your rental property to LLC has certain consequences and it is not suitable for all Rental Property owners. So, it is under your own discretion to analyze what actually your business needs.
“My whole purpose behind writing this article is to make you informed about protecting your asset and take the right measures if you haven’t yet.”
However, from the above examples you can understand that whether you have an LLC or not, you must have Landlord Insurance and an Umbrella policy. Though there is still a catch with an Umbrella Policy.
Not all umbrella claims get approved always. Some claims do get denied. It happened in the past and can happen with you too. Oh! You got a liability, we are happy to give you a claim. An insurance company doesn’t work like that. Furthermore, a normal umbrella insurance policy may not cover a rental property that is owned by an LLC. You need a commercial or a business umbrella policy then. It is always wise to read the fine print of the policy for the exclusions and limits that exist in the policy.
Even, if you have both the LLC and Umbrella Policy for your rental property, still you are not 100% protected. Some attorneys are experts in piercing the corporate veil that the LLC provides you. And if that happens, the liability can even pierce through the LLC on your own personal name.
Neither Just Umbrella Insurance For Rental Property Nor LLC, then What?
Yes, you can’t expect yourself to be 100% protected from a liability even if you have either an LLC, or Umbrella Policy, or have both. Treat these two as little cushions to absorb some part of the liability. When you own real estate and deal with tenants, occurring to liability is the harsh truth. You can only prevent this, plan for this but you can’t stop this. So have as much cover as your business needs to protect you from liability.
One tip here is to always try to have a good relationship with your tenants and act on your landlord responsibilities in time. Doing so, you reduce your chances of getting sued in a considerable amount. When you have more happy tenants and less disgruntled tenants, your rental business flourishes.
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