Umbrella Policy vs. LLC: What’s Best For Landlords?

Comparing an umbrella policy vs. LLC for your burgeoning real estate business? Discover the best insurance and protection options for landlords!

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Umbrella Policy vs. LLC: What’s Best For Landlords?Umbrella Policy vs. LLC: What’s Best For Landlords?

If you own an investment property or two, you might choose to rent it out. Doing so can be beneficial to your bank account and also ensures that the apartment or building is not left vacant for too long. And it also means you’re adding an impressive new title to your business cards: landlord. 

And while all of that is exciting, property owners also take on a lot of risk when they start to rent out units. That’s why it’s absolutely imperative to keep your assets and bank accounts protected. 

But, you might ask, what kind of liability protection do I need to protect my rental property and personal assets? There are plenty of options out there, but the two most popular are either getting an umbrella insurance policy or opening a limited liability company (otherwise known as an LLC). 

In this article, we’ll break down exactly what these types of asset protection are and how to decide which makes the most sense for you as a landlord. 

What is an Umbrella Policy?

When it comes to covering your liabilities, an umbrella policy is kind of like an extra strong back-up parachute. It offers a lot of protection and excess coverage — but the key word is here is excess. Umbrella policies only kick in when your main underlying policy has been maxed out.

Say the damage to your property exceeds what your homeowners insurance can pay. That’s when your umbrella policy will get used.

On a rare occasion, an incident might only be covered by an umbrella policy. If you’re a landlord, that might include a false arrest, slander, libel, or malicious prosecution. 

What is an LLC?

An LLC is a specific type of privately owned company. Yeah, we know, that’s not a very precise explanation. And get this: The rules governing an LLC vary by state, making it even harder to define. But in general, an LLC:

  • Offers owners personal liability coverage: generally, business owners can’t be sued personally for an incident; only their business and associated business assets can be sued. You also aren’t personally liable for any business debts. 
  • Does not offer personal liability protection for extreme cases: if you, the business owner and landlord, break the law, you won’t be covered. If it’s illegal, it’s illegal! 
  • Comes with a whole business structure: this means that landlords can remain anonymous to tenants, and dealings between various LLC members are clearly defined.
  • Does not come with extra liability limits: unlike an insurance policy, an LLC is worth what your business is worth — plain and simple. 

For many landlords, the legal separation of personal and business assets is the number one appeal of an LLC. But keep in mind that just having an LLC doesn’t stop you from getting sued. 

Umbrella Policy vs. LLC: Key Differences

We’re about to get into the nitty gritty and offer insights for when you’re choosing between umbrella insurance and an LLC. But before we get started, there is one thing we want to recommend: connect with a professional to discuss what types of additional coverage make the most sense for your rental properties. There’s no substitute for expert legal advice! 

Now that we’ve got that out of the way, let’s look at umbrella policies and LLCs in more detail.

Coverage Scenarios

Comparing an LLC and an umbrella policy is a bit like comparing peas and chocolate: Sure you can eat both, but beyond that…you get our point. 

One way to see the differences more clearly is to look at a few scenarios:

First (you have an LLC): Your tenant hosted a party during which their dog bit several children, causing physical injury and mental damage. All parents decide to sue for $3 million. Your LLC is worth about $2.5 million. In this case, your business isn’t worth enough to stop it from going under. (Sad but true!) 

If the parents' lawyers want to go after your personal assets to make up the difference, you might be forced to sell everything you own and possibly go bankrupt. Except you have an LLC! That means your personal assets are separate from the business, and they would remain protected. The lawyers (and their clients) wouldn't be able to touch your personal assets.

Second (you have an umbrella policy): Your tenant is injured in your property, and they successfully sue you. Because you have underlying property insurance and umbrella insurance, you would first max out the underlying insurance, and then your umbrella insurance would cover the remaining damages. You might have to pay a deductible or two, but you can remain in business. No LLC is needed. 

Costs and Tax Implications

Costs and taxes for both LLCs and umbrella policies depend upon your personal circumstances and the state where you live. The amount of money you pay can range from next to nothing to several thousand dollars. We're not human calculators, nor are we actuaries, which means that to get actual numbers, you need to talk to an expert. 

That being said, here are some average costs for each:

  • Umbrella Insurance: Small businesses could pay less than $2,000 yearly for umbrella insurance, sometimes as low as $40 per month. 
  • LLC: The cost of an LLC is a two-parter: generally, you’ll need to pay a filing fee, and then you need to pay an annual fee. The filing fee ranges from around $50 to $500, and the annual fee will run anywhere from $0 to $800 — though it varies greatly by state.

As for tax deductions, commercial umbrella policy premiums are usually deductible. An LLC, however, has a slew of possible tax deductions. You’ll need to work with a commercial property tax expert for more direction on getting the most out of your LLC. 

Ease of Management and Practicality 

When it comes to everything financial (and we mean everything), bureaucracy abounds. If you have questions about an umbrella policy, an agent can help you. Likewise, when it comes to managing your LLC, you can get assistance too. And while an LLC is a bear to set up, you’ll have the structure you need for your business once it’s up and running. 

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. They also cover a variety of events and you can also generally get legal fees covered via your umbrella policy. 

If you’re still debating between the two, here’s some good news: In every state, you can have both umbrella insurance and an LLC. So if you want to double your coverage, it actually is possible. Talk about a win-win!

Make the Right Choice for Your Property with Marble

If you’re a landlord, you know to take care of your property. But you also need to take care of yourself! With Marble, you can easily compare policies, get quotes, and earn rewards. Sign up today!