A Smile Is NOT the Best Insurance Umbrella

Just let a smile be your umbrella,
On a rainy, rainy day
And if your sweetie cries, just tell her,
That a smile will always pay
Whenever skies are gray,
Don’t you worry or fret,
A smile will bring the sunshine,
And you’ll never get wet!
So, let a smile be your umbrella,
On a rainy, rainy day!

When it comes to insuring your family's finances, you may need an umbrella policy. I explain what an umbrella policy does and why you might need one.

Let a Smile Be Your Umbrella” was a popular song written by famed Sammy Fain and lyrics by Irving Kahal and Francis Wheeler. The song was published in 1927 and successful early recordings reached the charts of the day in 1928. Wouldn’t it be really great if just a “smile” would really protect you?

With your money and finances, there’s no shortage of unforeseen circumstances that could impose a real risk to you and your family’s assets and financial future. So how can you protect yourself from life’s unexpected events?

A Personal Umbrella Policy

One answer may be a personal “umbrella policy” that helps protect you in situations such as: bodily injury liability, landlord liability, slander and libel, and property damage liability (damage or loss you cause to another party’s property).

Your homeowner, auto, and property policies pay for many legal claims. But you may need the extra protection afforded by what’s known as an umbrella policy, which pays for any legal settlement that ordinary insurance doesn’t cover. Say your pizza delivery guy slips and falls on your porch and sues you for $2 million. If your homeowner’s insurance covers only $1 million, the umbrella policy will kick in and cover the difference. The same applies if you get into a car accident and the other driver sues you for more than your auto insurance will cover.

It can be an important concern for a wealthy or “want to be wealthy” individual because a wealthy person is much more likely to be sued. That’s because they may be driving a new Mercedes rather than an old 1992 Volkswagen. Get the scenario?

Do You Need an Umbrella Policy?

The answer is: it depends.

You don’t need any policy to protect the total value of all your assets. You just need to protect the amount you’re at risk of losing in a lawsuit. The big problem is that that number is pretty tough to determine. Why?

Strange as it sounds, it has a lot to do with what you do for fun and what other asset protection strategies you are using. If you have really dangerous hobbies, like throwing wild parties where you trash your place and occasionally someone gets hurt (you’d never do that, would you?), perhaps you need more coverage than someone who spends most of their time reading mystery novels and sitting home alone on their couch. Even a house on a lake could be a liability if you invite your neighbors and their kids over for a great Fourth of July party and God forbid something really bad happens.

Some Real Life Examples of Umbrellas

It happens all the time. Someone slips on your sidewalk or falls while walking down the stairs. Hospital and doctor visits can add up quickly, and if the injury happened on your property, you could be responsible for covering all the costs.

A personal umbrella protection policy could help protect you in the event that a guest is injured in your home. Personal umbrella protection may cover the difference between your home insurance liability limit and the actual judgment—up to your personal umbrella limit, which could be potentially millions of dollars—helping protect your family’s finances and future.

For someone with no other asset protection strategies, a huge multi-million dollar policy may be warranted. If you are lucky enough to have real wealth, and by that I mean multi-millions, you can also insure by putting your assets in a limited liability corporation (LLC) which provides you protection in case of a lawsuit.

Such LLCs offer protection for someone like a very successful doctor who owns several apartment buildings and has a net worth of more than $20 million. Malpractice insurance covers his risks associated with his profession, but his secondary job as a landlord also puts him at a high risk of being sued for ridiculous sums.

A policy that large is only necessary if you’re at risk of a huge lawsuit. In most of our lives, ordinary slip-and-fall suits, people almost always sue and settle for whatever amount is covered by the liability insurance. So, that means for most of us, it’s not necessary to have multi-million dollar coverage.

The Insurance Game and the Complications

When adding liability to your homeowner, auto, and property policies, you could be forgiven for cringing at the total cost, which can run from hundreds to thousands of dollars. But there are ways to keep costs down without cutting back on your coverage.

First, I say stay away from a single broker that is looking for insurance rate proposals from a dozen different insurance companies.

Why? Because that guy may not be generating truly competitive bids. These kinds of brokers typically have good relationships with one or two companies and the other insurance companies know that they have little chance of earning that broker’s and your business. As a result, they won’t put in the time to give you a great serious quote.

Agents typically get the best quotes from the insurance companies they work with all the time and additionally, no matter how much you love your broker, he or she works on commission and has a strong incentive to keep your premiums high. Brokers generally get 10% to 12% of the premiums you pay every year, according to the Insurance Information Institute.

Experts think that dividing up the playing field of insurance sources is a better way. A few months before any insurance policy is set to renew, tell your broker you’re going to shop around for insurance. In writing, give him permission to speak to two or three specific insurance companies and no others. Make a similar request, in writing, to one or two other brokers. By having each broker get proposals from two or three different insurance companies, you’re inviting competition between the insurance companies and between them.

A Tried and True Way to Keep the Costs Down

You can also boost your coverage without causing premiums to skyrocket by increasing the deductibles on all your insurance policies. Then, use the money you save on premiums to increase your coverage.

This is particularly sensible for property and auto insurance policies because repairs that potentially cost just a few hundred bucks should not destroy your total asset base. If you’re financially healthy and responsible, then you are an ideal candidate to self-insure for non-catastrophic events like a fender bender with a larger deductible.

Final Thoughts

If you are the guy who loves to play ice hockey on the weekend with your buddies, then maybe owning a $3 million umbrella policy that will kick in to cover any legal damages that exceed the limits of other policies is your best bet. Premiums can be affordable and practical and give peace of mind. If you play ice hockey and you are at fault and hurt someone, the umbrella policy would kick in and protect you from being responsible for someone’s suit and potential lifetime damage award!

Are you a person who thinks about the “what ifs” and insurance? Even if you are not yet a multi-millionaire, saving money on insurance policies and walking that line to be well protected is important. How do you handle your insurance needs and plan ahead while the sun is still shining? You aren’t planning on a smile to be your only umbrella are you?

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