Disclaimer: I am neither an insurance professional nor an insurance expert. Please seek one out before you pay for a policy. I do not get paid to mention any companies listed in this article.
Experienced real estate investors always say it’s not a matter of if you get sued, but when. Whenever I hear this on a podcast I get slightly terrified for a few minutes. I’ve always had the mindset: “I’m just a small-time landlord with only a few properties – why would someone sue me? Plus, I’m military! Who would sue a military landlord?” I’ve always had liability insurance on my rentals that would cover anywhere from $300,000-$500,000 depending on the policy. That should be enough right? Nope. The unfortunate reality is that some people make a living suing property owners and people with money. These folks will go after your insurance company, and once they have collected all the money covered by your policy, they will come after your personal assets. Scary, right?
However, there is a great way to add a layer of protection to your personal portfolio: umbrella insurance! I’m getting an umbrella policy through USAA right now, and here’s what I’ve learned so far.
What Is Umbrella Insurance?
From USAA.com: “An umbrella insurance policy gives extra protection if you’re sued for the things you own, as well as your savings, investments, and in some states, your future wages. It can also help pay for legal defense costs.”
It’s important to understand that before you get an umbrella policy, you need to have a landlord home insurance policy on each of your properties. You can’t just have an umbrella policy to cover everything and be good to go. USAA requires me to have liability coverage of at least $300,000 for each property before they would let me purchase the policy. This means that if I get sued, the individual home policy will cover up to $300,000 to whoever sues me, and if the amount goes above that amount that’s when the umbrella policy will kick in and cover up to $2 million.
The policy covers more than just tenants suing my wife and I though. If I rear-end a 2001 Lamborghini Diablo and get sued for the value of the car (call it $250,000) and the owner’s medical bills (call it $500,000) the liability portion of my auto insurance will pay out first, and the umbrella insurance will pay the remainder up to the total amount of the policy. Thanks to the umbrella policy, the owner will get paid from my insurance, and won’t go after my TSP, Roth IRA, or my investment properties. Pretty awesome, huh?
How Much Does It Cost?
Not as much as you would think. For $2 million dollars of coverage, USAA quoted me $381.16 for the year. That’s less than $32 per month! I don’t have any of the properties in an LLC (Limited Liability Company) so in my opinion, having this umbrella policy is a must to protect our assets. I will probably move our assets into an LLC eventually to add another layer of protection, but I don’t think we’re there just yet.
I did have to raise the liability coverage for my car insurance but that amounted to only a few extra dollars per month. Also, my Pensacola house didn’t have liability coverage for $300,000 so I’m in the process of raising that with my Pensacola insurance broker. She assured me it would only increase my premium by $20 per year to hit the $300,000 minimum required by USAA for the umbrella policy. Money well spent in my opinion.
For a relatively low monthly payment, we were able to significantly reduce our exposure to litigation, protecting the following assets:
- Three single family rental properties (Pensacola, and two in Milwaukee)
- Personal checking and savings accounts
- Retirement accounts (Roth IRA’s, TSP’s)
I’ve always thought the “peace of mind” argument in the context of insurance is just a fear-based sales tactic designed to make people buy more insurance. However, I think umbrella insurance is a good value, and I truly will sleep better at night knowing I have this extra layer of protection over our personal assets.
Send me an email to chat more about umbrella insurance or any personal finance/real estate topics that interest you. Make sure you tell a friend and follow me @honorandequity on Instagram!