The best way to protect your investment property
If you own an investment property (or a few), renting it out can boost your income and keep the space from sitting vacant. Plus, you get to add a new title to your business card: landlord.
Exciting? Absolutely. However, renting out property also comes with risks, which is why protecting your assets and bank accounts is a must.
So, what kind of liability protection do you need? The two most common options are umbrella insurance and forming a limited liability company (LLC).
In this article, we’ll break down how each works and help you decide which option makes the most sense for you. The table below highlights some of the key features deflected by both types of protection.
| Feature | LLC (Limited Liability Company) | Umbrella Insurance |
|---|---|---|
| Purpose | Protects personal assets by legally separating them from rental property liabilities | Provides extra liability coverage beyond standard home or landlord insurance |
| Protection Type | Legal structure that limits personal liability | Additional insurance coverage for lawsuits and major claims |
| Covers | Lawsuits, debts, and liabilities related to rental property (but not personal liability) | Large liability claims, legal fees, and damages exceeding standard policy limits |
| Cost | Formation fees ($50-$500+) + annual maintenance fees | Typically $150-$300 per year for $1M in coverage |
| Tax Considerations | Can provide tax benefits (pass-through taxation) | No direct tax benefits; just an insurance policy |
| Liability Limit | Protection limited to assets held by the LLC | Extends coverage (usually $1M-$5M) beyond existing insurance policies |
| Ease of Setup | Requires legal filing, fees, and administrative upkeep | Simple add-on to existing insurance policies |
| Best For | Landlords with multiple properties or high-risk rentals | Landlords wanting extra liability protection without legal restructuring |
| Main Weakness | Does not provide direct insurance coverage | Does not protect against business-related debts or contracts |
What is an umbrella policy?
When it comes to covering your liabilities, an umbrella policy is kind of like an extra strong backup parachute. It offers a lot of protection and excess coverage, but the key word here is excess. Umbrella policies only kick in when your main underlying policy has been maxed out.
Say the damage to your property exceeds what your homeowners insurance can pay. That’s when your umbrella policy will get used.
On a rare occasion, an incident might only be covered by an umbrella policy. If you’re a landlord, that might include a false arrest, slander, libel, or malicious prosecution.[1]
Umbrella insurance typically costs between $150 and $300 per year for $1 million in coverage. However, like any insurance policy, your exact rate will depend on several factors, such as your assets, risk profile, and existing coverage.[2]
Umbrella policies start at $1 million in coverage and increase in $1 million increments.
To estimate how much coverage you need, first, total your assets, then subtract your current liability coverage. The difference represents your uncovered risk—rounding up to the nearest million is a good rule of thumb when choosing a policy limit.[3]
Landlord and Rental Property Insurance | The Zebra
Learn the basics of landlord and rental property insurance to make sure your investment is protected and you fully understand your policy before it's on the rental market.
What is an LLC?
An LLC is a specific type of privately owned company. We know that’s not a very precise explanation. Here's another fun fact: The rules governing an LLC vary by state, making it even harder to define. But in general, an LLC:
- Offers owners personal liability coverage: Generally, business owners can’t be sued personally for an incident; only their business and associated business assets can be sued. You also aren’t personally liable for any business debts.Â
- Does not offer personal liability protection for extreme cases: If you, the business owner and landlord, break the law, you won’t be covered. If it’s illegal, it’s illegal!Â
- Comes with a whole business structure: This means that landlords can remain anonymous to tenants, and dealings between various LLC members are clearly defined.
- Does not come with extra liability limits: Unlike an insurance policy, an LLC is worth what your business is worth — plain and simple.Â
For many landlords, the legal separation of personal and business assets is the number one appeal of an LLC. But keep in mind that just having an LLC doesn’t stop you from getting sued.[4]
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Asset protection
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Tax advantages
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Credibility in business
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Startup costs
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Fees or taxes
-
More operational tasks?
According to the U.S. Small Business Administration (SBA), starting a Limited Liability Company (LLC) in the U.S. typically costs less than $300 to register, though the exact amount depends on your state and business structure.[5]
If you hire an attorney to handle the paperwork and ensure everything’s set up correctly, legal fees can range from $500 to $2,000, depending on your needs and the firm you choose.
You might also run into other expenses, like name reservation fees, publication requirements (in some states), or licenses and permits. For the most accurate info, check with your state’s business filing office or visit the SBA’s website.[6]
Umbrella policy vs. LLC: Key differences
We’re about to get into the nitty-gritty and offer insights for when you’re choosing between umbrella insurance and an LLC. But before we get started, there is one thing we want to recommend: connect with a professional to discuss what types of additional coverage make the most sense for your rental properties. There’s no substitute for expert legal advice!Â
Now that we’ve addressed that, let’s examine umbrella policies and LLCs in more detail.
Take a look at these possible scenarios:
Scenario 1 – You have an LLC:
Your tenant throws a party, their dog bites several kids, and the parents sue for $3 million. Your rental business (held in an LLC) is worth $2.5 million. The lawsuit could wipe it out—but thanks to the LLC, your personal assets stay protected. The plaintiffs can’t go after your home, savings, or other personal property.
Scenario 2 – You have umbrella insurance:
A tenant gets hurt on your property and sues. Your landlord insurance pays up to its limit, and then your umbrella policy kicks in to cover the rest. You might pay a deductible, but your finances—and your business—stay intact. No LLC required.
Costs and taxes: What to expect
Costs for both LLCs and umbrella insurance vary based on your location and situation. You could pay anywhere from very little to several thousand dollars—so it’s best to talk to a legal or insurance expert for exact numbers.
That said, here are some typical ballpark figures:
-
Umbrella insurance: Small businesses often pay a few hundred dollars per year, with some plans starting around $40/month.
-
LLC setup and maintenance: Depending on your state, you will pay a filing fee ($50–$500) and an annual fee or tax ($0–$800). The cost increases if you hire a lawyer to set it up.
Tax-wise:
Is my liability insurance enough by itself?
Standard liability coverage—like what you get through your homeowners or auto policy—does offer some protection if someone sues you. It typically helps cover legal fees and settlements, but only up to your policy limits.
For everyday situations, that might be enough. But as a landlord, you're exposed to more risks, including:
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Tenant injuries
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Property damage claims
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Accidents that happen on your rental property
If something serious happens and you’re sued, the costs could easily exceed what your standard policy will cover.
That’s where umbrella insurance comes in. It gives you extra liability coverage on top of your existing policies—often in the millions. This added layer of protection can help you avoid dipping into your personal savings or assets if a big claim comes your way.
In short, standard insurance is a good start, but umbrella insurance is often the smart move for real peace of mind as a landlord.
Regular liability insurance covers basic claims, but its limits may not be enough for major lawsuits. Umbrella insurance provides extra protection by extending coverage beyond standard policy limits, making it a smart choice for landlords with multiple properties or high-value rentals.
| Feature | Regular Liability Coverage | Umbrella Insurance |
|---|---|---|
| What it covers | Liability claims included in your standard landlord or homeowners insurance policy (e.g., injuries on your property) | Additional liability coverage beyond the limits of your regular policy |
| Coverage limits | Typically $100,000 to $500,000 | Starts at $1 million and increases in $1 million increments |
| When it applies | Covers claims up to the limit of your primary policy | Kicks in only after regular liability coverage is exhausted |
| Types of claims covered | Injuries on your property, certain legal costs, and property damage liability | Larger lawsuits, legal fees, and additional liabilities beyond standard coverage |
| Does it cover personal liability? | Yes, but only within policy limits | Yes, extends liability protection for major claims |
| Does it cover business-related liability? | Limited—only if included in your landlord or business policy | No—strictly extends liability, does not replace business insurance |
| Who needs it? | Landlords with basic rental property risks | Landlords with high-value properties, multiple rentals, or high-risk situations |
| Cost | Included in standard policies | Typically $150-$300 per year per $1M in coverage |
Yes—most major insurance companies offer umbrella coverage, but there are a few things to keep in mind. Typically, you'll need to have your primary policies (like auto, homeowners, or landlord insurance) with the same insurer to qualify.
Also, not all umbrella policies automatically cover rental properties. If you own multiple rentals or higher-risk properties—like short-term or furnished units—you may need to list each one separately. Some smaller insurers may not offer umbrella coverage at all, or they might limit how much coverage you can get.
Legal considerations and liabilities
The legal protections that an LLC offers an owner are fantastic. An umbrella policy does not separate your business and personal assets.Â
Instead, umbrella policies offer coverage limits that reach into the millions. They also cover a variety of events, and you can also generally get legal fees covered via your umbrella policy.Â
If you’re still debating between the two, here’s some good news: You can have both umbrella insurance and an LLC in every state!
Ease of management and practicality
Let’s face it—anything involving finances usually comes with some red tape. Fortunately, umbrella insurance is relatively straightforward, and an insurance agent can guide you through the process and answer any questions. Managing an LLC takes a bit more effort, especially during setup, but once it's established, it provides a clear structure for your rental business. And you don’t have to go it alone—legal and financial professionals can help make the process smoother.
FAQs
What is an umbrella policy? NW Insurance Council
What is an umbrella liability policy? Insurance Information Institute
Umbrella InsuranceL A Complete Guide. SARSI
An LLC for your rentals? RentRedi
Register your small business. U.S. Small Business Administration
State-wise Secretary of State Links and Business Entity Search. LLC Buddy
Is umbrella insurance tax deductible? Independent Insurance Associates
What You Need to Know Before Creating an LLC For Your Rental Property. Roofstock
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About The Zebra
The Zebra is not an insurance company. We publish data-backed, expert-reviewed resources to help consumers make more informed insurance decisions.
- The Zebra’s insurance content is written and reviewed for accuracy by licensed insurance agents.
- The Zebra’s insurance editorial content is not subject to review or alteration by insurance companies or partners.
- The Zebra’s editorial team operates independently of the company’s partnerships and commercialization interests, publishing unbiased information for consumer benefit.
- The auto insurance rates published on The Zebra’s pages are based on a comprehensive analysis of car insurance pricing data, evaluating more than 83 million insurance rates from across the United States.