LLC and Umbrella Policies for Rental Properties

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.

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