How much umbrella insurance should we obtain?

Question

We own one house and will be purchasing two smaller rental units with cash in the near future and potentially a second home. We have roughly $500,000 in the bank. We will likely start out buying in our trust or an LLC but the main question is how much umbrella insurance is typically purchased when starting out? Is $1 million enough or do you feel safer with $3-$5 million with just a couple rental units?

Bill B. · Answer

What are you worth if you sold EVERYTHING that you own after paying off all debts?  That’s what you’re worth today. I’d get an umbrella for the next amount available over where you think that number will be in a year when you go to renew it. Then you can skip the llc and the trust. That’s just adding expenses and hassles.

Nathan Gesner · Answer

The reason umbrella insurance is so cheap is because it's almost never going to be used!

Do you know how many Landlords are successfully sued for more than their homeowner policy will cover? It's probably in the ballpark of being struck by lightning twice or winning the lottery. I manage 400 rentals, 13 years experience, and I've never been sued once. I don't know any investor that's been sued for more than a security deposit dispute or a slip-and-fall that was settled out of court for small potatoes. I've asked on this forum many times over my 13 years and I think there was only one guy that claimed a friend of his was successfully sued for something and he lost, but he couldn't even give details.

Insurance companies are in the business of making money. They sell umbrella insurance cheap because they know the odds of a claim are small, the odds of winning are even smaller, and the odds of winning more than your standard insurance policy will cover is even smaller.

Sam Yin · Answer

Weird how that is. I went through State Farm.  It was just under $300/yr for $2M. Now I'm paying about $450/yr for $5M.

Its gotta be based on location. I have all my vehicles and all but 3 properties with State Farm. They no longer insure investments in CA.

Bill B. · Answer

If you’re a married couple. Or living as a couple ina community property state you should be able to get a single policy.

That policy will state who and what is covered. Each person, each property and each vehicle will be listed. (Another reason for the umbrella over the llc/trust/etc etc. ) You are 10x or more likely to hurt/kill someone personally than your property is. Especially for your property to hurt/kill someone in a way for which you could not be held at all responsible. In which case every  llc you own would be lost to the lawsuit.

I n=can’t talk to a $300/year policy, mines closer to $1200 for $3mil with a dozen properties, 2 people and 2 vehicles. But maybe that’s Vegas related. We pay more to insure 2 x 4 year old $25k cars than we do for $2 million worth of properties.

Sam Yin · Answer

Ditto.

Each of my properties has its insurance already. The umbrella is the gap between a property and the rest.

For example, if I owned a primary property worth $800, but have a $500K note, its worth $300K. But it carries insurance. Then I purchase two rentals at $500 each, but put down $100K each. Thats another $200K of worth. AND they carry insurance. If I decide to buy a vacaiton/2nd home like my primary, that's another $300K. It alos carries insurance.  All told, I have about $800K in equity. I assume that a year or two from now, the go up in value and that $800 grows to $1M. On top of that, I saved $500K in the bank. There is about $1.5M of potential value one can extract from me.

An umbrella of $2M will be sufficient. It should cost about $300/year. Worth it! saves the hassle of the LLC and such.

With that said, if you continue to grow and your portfolio is worth over $5M, or more likely $10M, then I would consider bundling up a few pieces and wrapping them in an LLC, each up to $2M in worth.

I did the umbrella up to $5M. I put them into the family trust after. I only started to bundle pieces once they got past $5M. I put those bundles into the LLC. I also continued to carry the $5M umbrella for added measure.

Remember, the judgment need to surpass what the primary insurance covers, then it goes to the umbrella. It is highly unlikely that $5m+ could not do the trick.

Just my 0.02.

Allan C. · Answer

@Chad Deihl trusts and insurance are used for different purposes. Trusts simply define how assets are managed. Insurance is protection.

Chad Deihl · Answer

Thank you for the detailed responses.  We do already have a trust setup. We were thinking about adding the new properties into the name of the trust to avoid any probate issues should anything happen, which I feel is very smart.  But then that begs the question, would both people in the trust need personal umbrella policies? Sorta sounds that way.

How much umbrella insurance should we obtain?

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