{"id":108202,"date":"2019-03-04T14:30:49","date_gmt":"2019-03-04T21:30:49","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=108202"},"modified":"2021-03-16T14:52:40","modified_gmt":"2021-03-16T20:52:40","slug":"insurance-asset-protection","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/insurance-asset-protection","title":{"rendered":"Insurance or Asset Protection: Which is Best for Investors?"},"content":{"rendered":"

As a real estate investor, should you choose to get insurance or an asset protection plan?<\/p>\n

It’s a common question within the investing community. In fact, it’s often the\u00a0subject of fierce debate in forums like the one here on BiggerPockets<\/a>.<\/span><\/p>\n

But this shouldn\u2019t 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.<\/span><\/p>\n

Insurance vs. Asset Protection: A False Choice<\/h2>\n

When someone asks whether they need insurance or asset protection, they\u2019re engaging in a logical fallacy called a false dichotomy. The reality is that insurance vs. asset protection really isn\u2019t an either\/or proposition. If you\u2019re a real estate investor, you need both.<\/span><\/p>\n

So, why does the argument persist? There are a few reasons. <\/span><\/p>\n

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.<\/span><\/p>\n

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. <\/span><\/p>\n

Indeed, each is a tool with its own unique function for keeping you protected.<\/span><\/p>\n

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Related:\u00a0<\/strong><\/em>There\u2019s a 90% Chance You Have the Wrong Insurance Policy<\/a><\/em><\/p>\n

Why You Need Both Appropriate Insurance and an Asset Protection Plan<\/h2>\n

Simply put, you need the functions of both insurance and asset protection if you want to be confident that you won\u2019t be an easy target for a lawsuit. <\/span><\/p>\n

Let\u2019s take a closer look at the function of each:<\/span><\/p>\n

Insurance’s Role in Safeguarding Investment Properties<\/h3>\n

Insurance is an excellent first line of defense. It does a great job of keeping pettier lawsuits away. \u00a0<\/span><\/p>\n

Minor accidents involving third parties or modest personal injury claims can often be handled by insurance. If you think about it, it\u2019s a form of asset protection at its most basic level.<\/span><\/p>\n

Of course, having the most appropriate insurance policy for your purposes is critical. For many of us, a landlord\u2019s policy with general liability coverage will do. <\/span><\/p>\n

Others may need an umbrella policy. Do not, however, make the mistake of assuming an umbrella policy will keep all lawsuits away. <\/em>More specifically, it will not replace asset protection tools like LLCs<\/a>. <\/span><\/p>\n

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.\u00a0<\/span>Even worse, they may drop the investor-client who seeks their help in a complex situation.<\/p>\n

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.<\/p>\n

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Related:\u00a0<\/strong><\/em>Should You Put Your Rental Properties in an LLC?<\/a><\/em><\/p>\n

Asset Protection’s Role in Safeguarding Investment Properties<\/h3>\n

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<\/a>. While these entities confer many benefits, including possible tax savings<\/a>, let’s discuss their benefits in terms of lawsuit prevention. <\/span><\/p>\n

Here are just a few of the stronger protections of LLCs:<\/span><\/p>\n