Business Management

Real Estate Insurance 101: How to Best Protect Your Investments

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
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In a recent BiggerPockets article, Used Wisely, Debt Can Absolutely Produce Wealth: Here’s How,” I discussed the efficient, productive use of debt to build wealth, but I also referenced the fact that I don't worry about utilizing leverage to expand my portfolio of both real estate and notes, largely due to the fact that I'm a strong proponent of insuring all of my investments.

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The question that kept coming up was what insurances I use and how I use them to protect my real estate, and so, as promised, I would like to further discuss this topic.

First of all, I didn’t always think about insurance and investing the way I do today. I used to think that insurance was a necessary evil. It was something I wanted to spend as little money as possible on.

I'll never forget when I was a painting contractor, and I had a passenger van that I modified by ripping out all the seats and even installing ladder racks on the roof, but I had an insurance policy like it was a station wagon. My agent saw me one day, and he said, "What, are you nuts? It's a commercial vehicle… if you get it an accident, the insurance company just won't cover you at all. In essence, you're paying premiums for no coverage."

Boy, was I a genius.

I tended to do the same thing with life insurance. I bought the cheapest term insurance I could buy with the strategy that I’d become self-insured someday. It took years before I realized that you get what you pay for, and that term insurance can end up being the most expensive insurance you can buy — next to being self-insured.

Needless to say, years later and wiser, I’ve done a complete 360° change in strategy.

So, How Do I Insure My Real Estate?

There's many ways one can insure their real estate from the time of purchase with things like renters'/homeowners' insurance, to title insurance and even home warranties.

Some of these protect the bank, and some protect us, but many that protect the bank can indirectly protect us, too. For example, in the event of a catastrophe, such as the house burning down, if your insurance company pays to rebuild the house or pays off the loan, this not only protects the bank's capital, but it also protects you from the liability of covering the cost.

Related: Outside the Box: Looking at Property Insurance from a Different Perspective

As real estate investors, depending on skill sets and risk tolerance, we all have different preferred strategies for transferring risk and utilizing insurance. This could include everything from increasing coverage or riders to providing additional coverages for things like additions, private collections, disabilities, and loss of rents or use. You can almost insure against anything today, from major catastrophes like earthquakes and floods, to break-ins and fires.

Some strategies include increasing deductibles to lower premiums. Some of us lean towards being more self-insured by setting aside more reserves to handle that higher deductible or to have the cash on hand to take care of minor repairs, in turn making fewer claims.

Some of us may even carry an umbrella policy so as to increase our liability coverages. After all, the more you have, the more you have to lose.

Life Insurance As a Way to Protect Real Estate?

What I was really referring to in my last article was the ability to use more leverage to build more real estate wealth by utilizing life insurance.

I truly believe that it allows for more use of leverage by enabling us to decrease our risks. This, in turn, lets us be more productive. It gives us the peace of mind and confidence to utilize our assets in more productive ways without running the risk of losing everything.

Today, I even use life insurance as another investment bucket, and I use it as my own personal bank to do deals. Years ago, when I was still a painting contractor, I worked with a builder who taught me this strategy. He would borrow out of the cash value of his life insurance to build a house, flip it, and then pay back the policy loan, keeping the remainder of the profits.

There aren’t many loans that are easier to obtain than borrowing from your own policy.

Staying with this example, keeping money in a separate bucket (i.e. a life insurance policy) would protect the builder’s capital (in most states) from lawsuits and bankruptcy. The money in the policy builds tax-free, tax-deferred, and passes favorably to heirs.

If he passed, his family would have that money to pay off real estate properties if they wanted to, or maybe they would sell the properties and use the insurance money for something else. His heirs would have options.

Keep in mind — if you’re ineligible for life insurance, mortgage insurance may be a viable alternative to having no insurance. An example of this is my best friend growing up, who got terminal cancer when he was 36 years old, and he didn’t have life insurance. He did, however, qualify for mortgage insurance. When he passed, the mortgage insurance paid off the house that his wife and three kids still live in today.

Other Insurances to Consider

In another previous article, 3 Insurance Products You Probably Didn’t Know About – But Should Be Using,” I talked about crazy things like utilizing a “put” option on a real estate stock, like Pulte or Toll Brothers, to try to protect yourself against a major shift in the real estate market since most of us are so top-heavy with our real estate investments.

Related: Investors: Be Smart About Your Property Insurance

There are other insurances to consider that I use today, like Business Insurance and Workmen’s Comp. We can also insure real estate holdings and investments through things like the proper entity selections, titling, and groupings.

But the insurance that people disregard the most, which could help protect your real estate and family’s wealth, is Disability Insurance. A study by the Home Finance Agency of the United States government found that 48% of all foreclosures came from disability, while only 3% came from the death of a borrower. Approximately 50% of all bankruptcies and foreclosures come from the same form of disabilities. (See Press Release).

Long-term health care is another one to consider if you really want to protect your real estate portfolio for your heirs.

Now, I’m not advocating to overpay for insurance or to be over insured. But when I’m investing, I know that if I have enough disability insurance and life insurance, among other insurances, I don’t have to worry about my wife. It provides me with peace of mind, allowing me to leverage more and to continue building wealth.

To me, this is one of the best ways to become financially free, while at the same time keeping my tax deductions, with my tenants’ rent payments, buying properties for me and my family.

As you can see, there’s a lot that can go into protecting your real state and wealth in the best ways to pass on to your loved ones. My best advice to ensure this is to make sure that your whole team of advisors is on the same page when planning and utilizing strategies.

So, how do you insure your real estate?

Let’s talk in the comments section below!

Since 2007, Dave Van Horn has served as president and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender. In addition to his investments and role at PPR, Dave’s biggest passion is teaching others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of real estate.
    Frankie Woods Investor from Arlington, Virginia
    Replied about 6 years ago
    Thanks for the article and perspective Dave. As a military member and being single, term life insurance suits me just fine. That, combined with liability insurance, gives me more than enough coverage. But, I appreciate the out-of-the-box thinking!
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 6 years ago
    Hi Frankie, I understand your preference, as I utilized term life insurance when I was starting out, and it is cost effective for pure death benefit. Today, I use term to increase my death benefit so that the bulk of my permanent policy premium builds up the cash value in the account (serving as an investment bank). I also use my permanent policy as an asset protection tool. My best advice with term is to get convertible term, so that you have the option at a later date to convert it to a permanent policy without having to re-qualify for it based on your health. That way, if anything changes with your health or your personal preference in the future, you would still have the option. Thanks for reading Frankie! Best, Dave
    lissa hall
    Replied about 6 years ago
    Yeah, Nice article on insurance. It’s very important part or factor of the Business that everyone should take in to considered. Thanks for sharing.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 6 years ago
    Hi Lissa, I agree. Thank you for reading!
    Patrick D.
    Replied about 6 years ago
    Hey Dave, Do you mind sharing a bit in terms of note investing? First, do you guys put forced place insurance on your 1st mortgages? And second, what have you found to be the most cost effective solution now that you guys have a lot of REOs? I wanted to take a policy for our latest REO in Florida and the cost was prohibitive! I assume you guys reached the volume where some sort of umbrella policy makes more sense…
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 6 years ago
    Hi Patrick D, Thanks for your comment! 1. First, do you guys put forced place insurance on your 1st mortgages? Although we have the ability to, we normally don’t because of the type of first liens we buy. 2. And second, what have you found to be the most cost effective solution now that you guys have a lot of REOs? We just use national companies that specialize in insuring REOs, such as National Real Estate Insurance Group. I hope this helps! Best, Dave
    Craig Siphers
    Replied about 6 years ago
    Dave, I am a second generation real estate and insurance guy. You comment on the van being commercial and not having any coverage is probably your insurance guys way of scaring you. Yes, it’s a commercial vehicle but unless you have knowingly misrepresented the vehicle and use, you would likely not have coverage denied. You would be canceled immediately due to risk but that is what underwriting is all about. Far too complicated to get into in the space we have here but suffice it to say it is not that black and white. And relative to life coverage, it is a tool just as a hammer or screw driver. Term can sometimes be the very best method of transferring risk so do not discount it’s use in the right situation and there are many times it is the best financial risk management option. Craig
    Jim Asteriou from Dearborn, Michigan
    Replied over 5 years ago
    As an 18 year insurance agent who focuses on commercial and life insurance I agree with Dave. Many agents use fear or “pulling at the heartstrings” as they call it to scare you to buy more insurance than needed. In Michigan you are not going to be denied a commercial vehicle claim unless your dump truck hauling asbestos is rates as a a truck for personal use. Term Insurance is the way to go and yes convertible term and level premiums are key. I also always recommend a personal umbrella for at least a 1 million that costs 200 a year. The contractors I insure (70% of my business rate their vehicles on a personal policy (same policy as family) but if a sign is permanently attached we may add business use. I paid 40 a year extra to do this on a 2015 Buick Lacrosse.
    Colin B. Rental Property Investor from Astoria, NY
    Replied almost 6 years ago
    Dave – I’ve been reading a number of your articles all day. It’s clear that you really know you’re stuff – thanks for taking the time to write articles for those of us with less experience. I certainly agree with you on the benefit of various insurance policies (I have disability policy, a whole life policy that covers my mortgages, an EIUL, a policy on each of my buildings and an umbrella policy). Unfortunately, insurance is like plumbing. Most folks don’t notice the value of the plumbing until something goes wrong. And an insurance plan is only as good as the insurer underwriting it. So how do you determine which insurers to use on the various policies you have?
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied almost 6 years ago
    Hi C. BUMBY, For me, it’s a combination of things. I used to sell insurance, so I can work off of that knowledge base. Also, I network with a lot of agents, and so there are certain people that I trust, who tell me which policies are best. But, it really depends on what I’m trying to do and which risks I’m planning to mitigate. For example, if you were trying to build up cash value in a policy, acting as a family bank, there’s different policies that allow you to build accessible cash value much quicker. Whereas, other policies may be geared more towards death benefit. My best advice is to determine your insurance goals, gain knowledge about the policies, and get a recommendation from someone you know and trust, who has used the policy. Also, checking out the company’s ratings, how long they’ve been in business, how their re-insured, etc. could be helpful. Also, I believe I wrote an article related to this topic awhile back, “Who’s Your Financial Advisor?” I hope some of this info helps! Dave
    Replied over 5 years ago
    When my Parents died they willed the family Home (and about 100 acres+/-) to us children. The currently is no insurance on said property,. How would we go about buying liability insurance to cover the property…??
    Replied over 5 years ago
    This is an 125+ yr old Jenny-Lynn type home on a sandstone block foundation..Other than sentimental,There;s probably not a lot of value in the home itself.. Im concerned about having liability insurance to cover claims of accidents on the property.. Even tho someone may be trespassing at the time; if they fall, get hurt, or even a guest were to somehow get injured and they file a lawsuit we need to be covered.. Do we need to individually get insurance or can we form some type of Family Trust that covers all of us in one policy?? there are 10 of us in the heir ship..luckily we manage to get along..thanks again.. Frank