Are you a real estate investor? Chances are you either use an umbrella insurance policy or an LLC to protect yourself from liabilities concerning your property. There are, however, certain situations one can be more beneficial than the other.
To understand fully, you need to understand the different protection that each one provides. Many real estate investors don't fully understand the implications of using an LLC/Corporation, but this is especially true when it comes to umbrella policies.
Umbrella insurance is a policy that adds extra protection beyond the existing limits of current in-force policies. Umbrella policies usually provide extra coverage for things like injuries, property damage, and certain lawsuits. Depending on the type of umbrella, it may cover different types of liability situations.
Let's say you have pool insurance under your homeowners or landlord policy with $100,000 of liability coverage and business general liability insurance of $500,000. Then, you also have a $1 million umbrella policy that could give you $1.1M of pool liability coverage and $1.5 million of general business liability coverage.
An umbrella policy doesn't cover any additional areas of liability or risk. It only adds more coverage to your existing coverage. The umbrella policy isn't as great of an asset protection tool as its name implies after all.
Hypothetically speaking, let's say you own a business that provides home appliance services to residential customers. One day a claim is made against you by a customer against your LLC for damages from a failed, and expensive, appliance repair.
Now, this customer is going to file a lawsuit against your LLC. But that doesn't matter, because you're covered! You don't just have liability insurance, you also have an umbrella insurance policy, that's two layers of protection! But when you go to the insurance company with the claim, you get denied on both policies.
Why? Because your general liability policy didn't provide coverage for failed repairs. But it gets worse … Because your primary General Liability policy denied the claim your umbrella policy is also not going to pay out. This is why it is imperative to have a thorough understanding of your insurance coverages and to make sure that you take the necessary steps to protect yourself and your assets.
The good news is, you are here. You have learned the fundamentals of asset protection that we teach through Royal Legal Solutions. After identifying your vulnerabilities, you may even have gotten an LLC set up. Because of that action, your personal assets are not at risk, but your business could still end up having to pay a large settlement.
An umbrella policy is a great tool when you have your defense wall set up properly. However, keep in mind, that umbrella policies only cover above existing levels of the underlying policies. They are not a catch-all. That said, if you have them set up properly, they are a cost-effective way to achieve the extra security you may want and need.
Think of the LLC or corporate structure as Old Faithful. Insurance can and will drop you the minute you actually need it. An LLC (or other corporation), on the other hand, protects you from liabilities that arise in the LLC and prevents a plaintiff from being able to go after you personally.
What is at risk in a lawsuit against the business entity (LLC or corporation) however, is the assets of that business itself. A creditor could collect against the assets of that business. So, for example, if you have an LLC with multiple rental properties with equity, then those properties and their equity would be at risk in a lawsuit.
Next, let's go over the cost of both LLCs & Umbrella policies.
The cost of an LLC, depending on how you go about getting one, will cost you a few hundred dollars. You can also expect about $50-$200 in fees per year to keep your LLC active with the state (each state is different, Arizona is $0 and California is about $900 annually, for example).
If you have a partnership LLC or a corporation then you also have the cost of an LLC partnership tax return or a corporate partnership tax return.
Umbrella policies typically cost between $150 and $300 dollars for the first $1,000,000, and then on average, another $100 dollars per additional million dollars per year.
Umbrella policy benefits include access to attorneys who your insurance company will appoint and pay to defend you in order to get the lowest possible settlement payout. There may be certain exclusions to your coverage that leave you without coverage for your risk. (You might have some costly holes in your umbrella). This is why it is critical to work with a knowledgeable insurance agent who is going to do everything in their power to ensure that you have the appropriate coverage you need to protect yourself.
Now we can finally get to the part you've been waiting for!
What it comes down to is what kind of property you own. If you own a multi-unit property or commercial property you should consider having both an LLC and an umbrella policy because you have more liability exposure when you have more tenants.
On the other hand, if you have a single-family rental in an otherwise good neighborhood where you feel you are less likely to be sued, then you could consider having just one, an LLC or an umbrella policy.
You should always consider both an LLC and an umbrella policy. But most of all get all the information you need to make an informed decision. That way you are protecting your assets in the most efficient and cost-effective way possible. Royal Legal Solutions can assist you in forming the best structure for your situation. Schedule your asset protection consultation today and let the professionals worry about your liability instead.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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