Real Estate Investing Basics

Insurance or Asset Protection: Which is Best for Investors?

Expertise: Business Management, Personal Finance
43 Articles Written
two puzzle pieces about to be fit together with blurred cityscape in backdrop

As a real estate investor, should you choose to get insurance or an asset protection plan?

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

It’s a common question within the investing community. In fact, it’s often the subject of fierce debate in forums like the one here on BiggerPockets.

But this shouldn’t be a debate at all. Here’s why: both insurance and asset protection play important roles in protecting the average real estate investor from lawsuits.

Insurance vs. Asset Protection: A False Choice

When someone asks whether they need insurance or asset protection, they’re engaging in a logical fallacy called a false dichotomy. The reality is that insurance vs. asset protection really isn’t an either/or proposition. If you’re a real estate investor, you need both.

So, why does the argument persist? There are a few reasons.

One difficult to ignore is that investors bring their own experience and perspective to the table when forming opinions about strategy, business structure, and best practices. And if someone has never been sued, they may believe whatever they are doing is the best way to prevent lawsuits, whether it is or not.

The other reason the argument lingers is due to the public’s misunderstanding of the very concept of asset protection. Insurance is neither a substitute for nor a direct competitor for a thorough, comprehensive asset protection strategy. Insurance does not replace or preclude an investor from availing themselves of the benefits of legal asset protection tactics, such as entities or trusts.

Indeed, each is a tool with its own unique function for keeping you protected.

steel mesh grid with wet concrete poured on part

Related: There’s a 90% Chance You Have the Wrong Insurance Policy

Why You Need Both Appropriate Insurance and an Asset Protection Plan

Simply put, you need the functions of both insurance and asset protection if you want to be confident that you won’t be an easy target for a lawsuit.

Let’s take a closer look at the function of each:

Insurance’s Role in Safeguarding Investment Properties

Insurance is an excellent first line of defense. It does a great job of keeping pettier lawsuits away.  

Minor accidents involving third parties or modest personal injury claims can often be handled by insurance. If you think about it, it’s a form of asset protection at its most basic level.

Of course, having the most appropriate insurance policy for your purposes is critical. For many of us, a landlord’s policy with general liability coverage will do.

Others may need an umbrella policy. Do not, however, make the mistake of assuming an umbrella policy will keep all lawsuits away. More specifically, it will not replace asset protection tools like LLCs.

These policies are not equipped to deal with the next level of liabilities that asset protection tools shield us from. And the unfortunate truth is that insurance companies will often look for any excuse to decline coverage. Even worse, they may drop the investor-client who seeks their help in a complex situation.

While insurance is a critical first step in the right direction, there are situations when your insurance policy cannot help you out. These instances may be written into the policy or simply outside of its limits, but they are fairly common in the real estate world.

simple wooden fence creating barrier on a beach

Related: Should You Put Your Rental Properties in an LLC?

Asset Protection’s Role in Safeguarding Investment Properties

Asset protection plans are usually premised on an entity that limits your personal liability, such as the limited liability company or some other version of it like the series LLC. While these entities confer many benefits, including possible tax savings, let’s discuss their benefits in terms of lawsuit prevention.

Here are just a few of the stronger protections of LLCs:

  • LLCs protect you by stopping lawsuits before they start. Removing your personal name from property is one of the biggest advantages of the LLC. Doing so makes suing you successfully more difficult.
  • LLCs can help protect you from lawsuits involving the word “fraud.” And many plaintiffs will claim this in pursuit of higher damages, whether based in fact or not. Compounding matters, in the legal world, the word “fraud” is defined broadly. Insurance doesn’t usually touch anything alleging fraud.
  • LLCs can protect investors from landlord-tenant suits, but most insurance policies won’t. Judgments in these suits can be high enough to force foreclosures or have other nightmarish outcomes.

Bottom Line: Be Wary of Gurus and Professionals Pushing One Solution

Whether addressing the insurance or legal side of your asset protection strategy, you will want a competent insurance agent or attorney. One way you will know you have found that individual is if they are honest about the limitations of their tool, as well as its strengths.

For instance, an insurance agent who tells you their policy will protect you from all lawsuits is deceiving you. And an attorney who tells you that you don’t need insurance is either incompetent or knowingly exaggerating.

The best professionals are realistic about what you can expect out of their services. They also know when to seek help from other pros. Use this knowledge as a basis to help test for integrity the next time you are seeking the guidance of either an agent or attorney.

Are there any additional differences between insurance and asset protection you’d add to this list?

Help out fellow investors by commenting below!

Scott Royal Smith is a real estate asset protection attorney based in Austin, TX. His firm, Royal Legal Solutions, designs asset protection strategies exclusively for real estate investors. As an investor himself, Scott is sensitive to the needs of real estate investors; as an attorney, he maintains a working knowledge of the best legal strategies available for preventing lawsuits. Connect with Scott here on BiggerPockets or visit his website, www.royallegalsolutions.com, for more information about asset protection for real estate investors. Check out all of Scott’s previous work for BiggerPockets here.

    Nathan G. Real Estate Broker from Cody, WY
    Replied 9 months ago
    Good, solid explanation, Scott. It’s a question that comes up on the boards about 47 times a day and the advice given is pretty mixed so I appreciate your clarity.
    Scott Smith Attorney from Austin, TX
    Replied 9 months ago
    Thanks for the feedback! I am working to provide more resources on topics that I see often in the forums. Are there other topics that you would want to see an article/resource on?
    Casey Barickman from Oxford, Mississippi
    Replied 9 months ago
    Good article. Question, when financing investment properties, how can one use asset protection with traditional financing through Freddie and Fannie? My understanding is that you can not move a traditional financed property to an LLC. Am I correct? If that is the case, what types of insurance/asset protections should we obtain to protect ourselves? Thanks!
    Jen Narciso Investor from Montclair, NJ
    Replied 9 months ago
    Great article! I’m tacking on to casy’s question as well. We have a property that we want to move to an llc. However, we don’t want to pay the much higher interest rate to refi into an llc but are afraid to just move it with our current mortgage in case the bank then requires full re payment for transferring into a different name. Any thoughts or suggestions on how to protect ourselves without paying so much more?
    Jen Narciso Investor from Montclair, NJ
    Replied 9 months ago
    Great article! I’m tacking on to casy’s question as well. We have a property that we want to move to an llc. However, we don’t want to pay the much higher interest rate to refi into an llc but are afraid to just move it with our current mortgage in case the bank then requires full re payment for transferring into a different name. Any thoughts or suggestions on how to protect ourselves without paying so much more?
    Scott Smith Attorney from Austin, TX
    Replied 9 months ago
    Many lenders will trigger the Due on Sale Clause for transferring a property directly into an LLC. You can avoid this issue by first transferring the property into a Land Trust, which is an inter vevos trust protected by the St. Germain Act, and then assign the LLC as the beneficiary of the Land Trust. This does not trigger the same red flags, but still offers you the liability protection. On top of the financing benefits you can also use these trusts to assist with anonymity and estate planning. You can check out this article for more on the financing piece. https://www.biggerpockets.com/blog/llc-lending-problem/