Getting insurance is an integral part of running a business. Some insurance is mandatory, some is highly advisable, and some is merely good to have if you can afford it. Understand which insurance to get when starting out and consider some ideas you can use to make it affordable.
Understand which insurance to get for your start-up
There are certain types of coverage you’re required to carry by federal or state law, depending on your activities.
- If you have employees…you must have unemployment insurance. This is collected like a tax by the federal government (called FUTA) and your state. The federal tax is a flat rate per employee, while the state rate usually depends on your rating, which is based on unemployment claims made against your company. When you start out, the state assigns you a rate, which can decline each year if you don’t have any claims; it may increase if you do. You also must have workers’ compensation (other than in Texas where it’s voluntary). And you may be required to provide health insurance to your staff, which is a federal obligation if you have 50 or more full-time and full-time equivalent employees; a few states (e.g., Massachusetts) have their own rules.
- If you (or employees) use a company vehicle…you must carry insurance for your company car, truck, van. If you use your personal vehicle for business driving, be sure that your insurance company knows this so you can be covered in case of an accident while driving for business.
- If you have a defined benefit (pension) plan…you must pay premiums annually to the Pension Benefit Guaranty Corporation (PBGC) to protect employees in the plan in case you default on your promise to pay their pensions.
- If you conduct certain activities…you may need certain bonds, which are a type of insurance. For example, if you are in construction, you may be required by the terms of a contract for a project to have a performance bond. This protects the other party in case you default or fall short. Similarly, if you have employees who go into homes and businesses, you likely have to carry fidelity bonds to protect against your employees’ theft or damage in those locations.
- If you market products you’ve developed…you usually must carry product liability coverage if you want to get your products on store shelves.
Even though you aren’t required by law to have other insurance, you shouldn’t operate without having a business owner’s policy (BOP). This policy bundles liability and property coverage for a small business owner. The liability part protects you from negligence claims raised by customers (e.g., a slip in your store) and damage to your equipment and inventory (e.g., a fire on your premises).
If you are a professional, you also should carry an errors and omissions policy (E&O). Think of this as malpractice insurance.
When you just get started, you may not have the bankroll to carry other types of coverage that would be helpful protection for you. Consider these other options when and to the extent you can afford them:
- Business interruption/business continuation coverage.
- Umbrellas coverage. This policy is a supplement to your BOP. It provides additional liability coverage to the extent of the policy limit.
- Employment practices liability insurance (EIPL). This protects an employer from employee claims for discrimination, sexual harassment, wrongful termination, and retaliation.
- Long-term disability coverage for you as the owner. If you become disabled for more than a short period of time, you could use a private long-term disability policy to help continue your income. While Social Security offers disability benefits, the amount may be less than what you need to maintain your lifestyle.
- Health insurance even if not mandated by law. If you have no employees, you want coverage for yourself (and family). If you have employees, you probably want to help them obtain health coverage, especially in a tight labor market where large employers routinely offer this fringe benefit. You can offer a group health plan—and share the cost with employees if needed. Or you can help pay for employees’ individually-obtained health coverage through a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) or an Individual Coverage Health Reimbursement Arrangement (ICHRA). Company payments are deductible and may even entitle you to a federal income tax credit.
- Key person life insurance. If your business depends on the talents of a particular person, such as a head designer or programmer, you might want to insure their lives. The business is the beneficiary, which can use the proceeds to recruit new talent and weather a drop in revenue until that talent is in place.
- Group-term life insurance. This is an inexpensive employee benefit which is tax free to staff for coverage up $50,000 per employee. Premiums are fully deductible.
- Cyber liability coverage. If you have a website that’s hacked, you face a potential menu of costs, from ransomware to government fines. This coverage protects against data breaches and security issues and the costs they could trigger.
Ideas for getting coverage
You want to optimize your coverage while minimizing your cost. It’s advisable to work with a good insurance agent who deals with business coverage. The agent for homeowner/renter policies may not have the expertise to advise you on the business coverage you need.
Other ideas for insurance coverage:
- Understand the different types of insurance coverage and what’s important for your type of business and industry. A good resource is the Insurance Information Institute (III).
- Prioritize insurance coverage. You must have it in some cases and should have it in many other, so budget accordingly.
- Reduce your premiums by increasing your insurance deductible. Remember insurance is meant for a “may happen” situation, so be prepared to pay a larger deductible in case it does.
- Review your coverage annually. Don’t simply renew policies because your business needs may change, policy options may be different, and always shop around.
- Reduce your risks. Use business practices that can minimize insurance claims. For example, a safe workplace can reduce or eliminate liability claims by customers and workers’ comp claims by employees.
Things happen; that’s why you need insurance.
“The wise man looks ahead. The fool attempts to fool himself and won’t face facts.”—Proverbs 14:8.