Like health insurance or car insurance, small business insurance is something you never want to use. It means something bad obviously happened! When something unexpected happens, having business insurance is the difference between success or failure. Many businesses aren’t covered, and don’t have small business insurance.
According to Next Insurance, 44% of small business owners don’t have business insurance – even after they’ve been in operation for over a year. By purchasing business insurance, you’re able to protect your company assets from damage, and potential legal claims. Many small business owner don’t purchase business insurance because of how confusing the process is. Every single business needs a different type of insurance package depending on the size and type of the company, their location, and their industry. If you’ve just started your business, this can be a difficult decision and potentially expensive.
What’s business insurance?
You’ve probably dealt with car insurance, health insurance, etc. Each of these different insurances help protect you you in the event of an emergency. Business insurance operates the same way as personal insurance. Business insurance will protect your business from financial issues, legal issues, or other claims, like a personal injury on your premises, lawsuits, disasters, etc. Like personal insurance, there are many different types of business insurance and the specific type will depend on your business, what you do, whether you have employees – and even your industry.
It will be up to you to decide what type of small business insurance you need, and where to get the best possible coverage. There are 9 types of business insurance you’ll want to consider, 3 of them are potentially required by law if your business has employees.
Why you should get small business insurance
If your a sole prop, or you only have a few employees – you might think you don’t need small business insurance. In reality, business insurance is a necessity to help protect your business and assets. 1/3 of businesses fail before their second year. Having business insurance can reduce some of the risks associated with owning a business because it can safeguard your business, and employees, against property damage and other legal claims filed against the business.
According to the Small Business Administration, 30-50% of all small businesses face litigation in any given year. Most small business owners don’t have the financial means to deal with their legal issues, and the cost of not having small business insurance can be higher than the cost of purchasing business insurance. Certain types of business insurance is required by law. For example, most states require that companies with employees purchase workers’ compensation insurance and unemployment insurance. In most states, disability insurance is required as well.
But there are other scenarios where you might need to buy insurance, such as when you’re raising money from potential investors, or getting a business loan. Each industry has different requirements. For example, if you own a car – you will want to get commercial auto insurance on it. If you manage sensitive data online, you’ll want to buy cyber liability insurance.
9 Types of Business Insurance
- Workers compensation insurance is required. It usually costs $.75 to $3 per month, per $100 of payroll. It covers claims that result from work related injuries.
- Unemployment insurance is required. It varies state by state in terms of cost, but usually costs .6% federal tax rate for most businesses. It guarantees a portion of the employees wage after there is a job loss.
- Disability insurance is another required insurance which costs .25% to .5% of payroll. It guarantees a portion of the employee’s wages after an illness or injury.
- General liability insurance is another required insurance costing $400 to $600 per year. It covers certain losses that your business causes another client/company.
- Commercial property insurance costs $1000 to $3000 per year. It covers things like theft, fire, weather related property damaged, and even vandalism.
- Professional liability insurance costs $900 to $1800 per year, and it covers issues arising from business negligence or even malpractice.
- Product liability insurance costs $.25 per $100 of product sales, and covers things like design flaws, product flaws, manufacturing flaws.
- Employee practices liability insurance costs $800 to $3000 per year, and covers things like wrongful termination, or discrimination claims.
- Key person insurance costs less than $1000 per year, and handles things like replacing lost income from an owner’s/executive’s death or disability.
Workers Compensation Business Insurance (Required)
This is one of the few business insurances that are required. If you have employees this is is considered mandatory. States require employees to carry this in case employees are hurt. This is a requirement you don’t want to take lightly. Failure to purchase it can result in fines and even criminal penalties. If you have an employee work related injury, workers comp covers the medical expenses and pays them a portion of wages while they are recovering. You can purchase this insurance through a broker or private carrier. This usually costs $.75 to $3 per month per $100 in employee wages. Many states, like NY, have a state-run insurance fund which sells workers comp insurance at pre-determined rates.
Unemployment Insurance (Required)
This is another government required insurance coverage. This covers your employees in the event of a job loss, or termination. Unemployment insurance isn’t something you purchase from an insurance carrier. Along with payroll taxes, employers pay federal unemployment taxes and state unemployment taxes. The state is the one who is administering this program. Your tax burden will depend on the number of employees you have, your turnover of employees, and whether you’re a new, or established, business. Employers can calculate their SUTA and FUTA tax payments on their own. It’s very easy to let an HR software or payroll software take care of the calculations for you.
Disability Insurance (Required)
This essentially guarantees payments to employees at a % of their income if they’re unable to work because of an illness/injury. Unlike workers comp, this illness doesn’t have to be work related. For instance, a pregnant employee can get disability benefits. Currently, 5 states require employers to have some sort of short term disability insurance. This covers employees 3-6 months after they’ve been injured, or fall ill. Even if you’re not in one of those 5 states, short term disability coverage can provide some degree of peace of mind to your employees and make you a more competitive place to work. Long term disability coverage, lasts until the expiration date in the policy or until the employee is able to return to work.
General Liability Insurance (Required)
Businesses aren’t legally required to get general liability insurance. This is one type of business every single small business should get. General liability insurance protects your business if someone, such as a client, vendor, or customer, gets injured by your product, service, or on your business premises. Below are examples of losses covered:
- Injuries incurred on business property
- Damage to another person or business while carrying out your work
- Advertising injuries, such as libel, slander, etc.
This is a virtually must have type of coverage, especially if you’re in an industry where injuries are more likely to occur, such as landscaping, manufacturing, or even construction. Business insurance quotes typically range between $400 to $600 per year.