Why Do You Need Small Business Insurance?
Most states require businesses with employees to purchase worker’s compensation insurance and unemployment insurance. Some states add disability insurance to that list.
Aside from legal obligations, business insurance’s need stems from the nature of your location, products, or services. Certain products, for instance, have a higher likelihood of incorrect manufacturing. In the same sense, failure to provide certain services correctly could result in severe physical or financial damage. Then there’s the all-too-common scenario of torrential weather ruining your property.
You may also have to purchase other insurance types solely because of your industry or using specific resources. Commercial auto insurance, for example, is likely needed for most businesses that own company cars. You might also have to purchase insurance to accept funds from investors or small business loans. If your company works with sensitive personal information, it’s probably wise to look into cyber liability insurance.
Lastly, consider the tremendous costs of litigation. The average small business cannot cover these costs on its own. In this case, the cost of paying for insurance pales compared to the cost of not having insurance when you need it most.
What Are the Most Common Types of Small Business Insurance?
Many business owners set out to purchase insurance but quickly become overwhelmed by the number of choices. They probably felt that the more time they spent shopping for insurance, the more likely they were to overspend or buy nothing at all. To simplify this process, we’ll break down insurance types that apply to most small businesses. Anything beyond the following list only pertains to highly specific cases, like those mentioned in the previous section.
Most small businesses should at least look into these types of business insurance:
|Workers compensation (required)
|$0.75 to $3 per month per $100 of payroll
|Unemployment insurance (required)
|Varies by state (0.6% federal tax rate for most businesses)
|Disability insurance (required)
|0.25% to 0.5% of payroll
|General liability insurance
|$400 to $600 per year
|Commercial property insurance
|$1,000 to $2,000 per year
|Professional liability insurance
|$900 to $1,800 per year
|Product liability insurance
|25 cents per $100 of product sales
|Employment practices liability insurance
|$800 to $3,000 per year
|Key person insurance
|Less than $1,000 per year
What Is Workers Compensation Insurance?
State law requires most businesses with employees to carry specific amounts of worker’s compensation insurance. It covers claims from employees who suffer work-related injuries. If you don’t purchase the required amount for your business, you may face fines or even criminal prosecution.
Worker’s compensation insurance, or “workers comp,” covers the injured employee’s medical expenses and ensures that he or she receives reasonable compensation during recovery. The term “work-related injury” doesn’t just refer to injuries that occur in obviously dangerous environments like construction sites. An employee could receive workers comp for neck pain that was gradually exacerbated because their desk lacked sufficient lumbar support. Workers comp also typically covers the cost of employee lawsuits for work-related injuries.
Your state’s insurance department or worker’s compensation board will tell you everything you need to know about purchasing workers comp. Some businesses purchase it through private carriers or brokers, while many others take advantage of state-run programs. These insurance funds offer workers comp at regulated rates, so you don’t have to worry about paying too much.
What Is Unemployment Insurance?
Unemployment insurance covers employees who lose their jobs through no fault of their own. You don’t have to seek private carriers or brokers to purchase this government-required
insurance. Most small businesses pay federal unemployment taxes (FUTA) as well as state unemployment taxes (SUTA). Your home state uses funds from both taxes to distribute unemployment insurance, also known as unemployment benefits. The former employee, however, will not receive unemployment insurance unless he or she applies.
The amount you pay for each tax depends on numerous factors like the number of employees, employee turnover rate, and unemployment claims. You can keep your FUTA rate low by only hiring full-time employees when you need them. This will almost certainly decrease your employee turnover rate.
For example, let’s say you have to hire three different people for the same position in the same year. Your total FUTA tax would theoretically be three times the amount of what you would have paid had your original employee stayed onboard.
If your expected FUTA tax liability exceeds $500 for the year, you must pay FUTA taxes every quarter. If not, you have two options. You can either make quarterly payments or pay once per year when you file your IRS Form 940. SUTA deadlines, on the other hand, vary from state to state. So, contact your state unemployment agency to find out your state’s due dates.
Though you can make payments on your own, it’s probably much easier to use HR or payroll software. These services can calculate and make your payments with little effort on your part.
What Is Disability Insurance?
Like workers comp, disability insurance provides employees with portions of their income if an illness or injury prevents them from working. The illness or injury, however, does have to be work-related to receive disability insurance. For example, if an employee undergoes surgery, they will receive disability insurance, or disability benefits, during recovery.
As of 2020, just five states require employers to provide short-term disability insurance: New York, California, Hawaii, New Jersey, and Rhode Island. This type of disability insurance provides 60-70% of the employee’s base salary for three to six months after the injury or illness occurs. Long-term disability insurance typically provides 40-60% of the employee’s base salary until they return to work.
More prominent companies offer short-term disability insurance primarily to attract the most talented job candidates. Many others offer no disability insurance at all.
What Is General Liability Insurance?
Though not required by state law, general liability insurance protects deals with extremely common misfortunes for specific industries. Let’s say one of your customers or vendors sustains an injury on your property or from your products or services. General liability insurance would help cover the costs of the lawsuit filed against your company. For this reason, industries with particularly high risks of injury like basically cannot exist without general liability insurance. Examples of such sectors include construction or landscaping. The policy’s annual cost may vary depending on the level of risk associated with your industry.
Or, say another company sued your business because one of your advertisements looks too similar to theirs. General liability insurance would help cover the legal costs of settling the claim. You would also have protection from claims of libel and slander against your business. This comes into play when another company claims that you publicly tarnished its reputation. It’s not hard to imagine a wrongfully-worded advertisement or media interview triggering this scenario.
What Is Commercial Property Insurance?
Like general liability insurance, the inherent risks associated with specific industries require commercial property insurance. Many would argue that all brick-and-mortar businesses should purchase this coverage, protecting your business’s inventory, equipment, and physical property from loss or damage.
Applicable incidents include theft, fires, vandalism, explosions, and specific weather-related incidents. The typical package excludes severe natural disasters like earthquakes, floods, or tornadoes, but would likely cover flooding damage from plumbing issues. You can pay extra to add coverage for specific hazards. However, the typical package for your area should include the most common weather-related incidents.
Companies with high risks of property damage should also look into business interruption insurance. While commercial property insurance covers the cost of repairs or new assets, business interruption insurance accounts for the income you lose due to these incidents. Your insurance provider will likely allow you to add business interruption insurance to your commercial property coverage.
What Is Professional Liability Insurance?
Also known as errors and omissions insurance or malpractice insurance, professional liability insurance covers financial losses due to your business’s negligence or malpractice. Typical policyholders include doctors, lawyers, real estate agents, accountants, and IT (Information Technology) professionals.
Some states even require doctors and lawyers to have professional liability insurance. But anyone who provides expert advice or services should consider this coverage. We all make mistakes, right?
For example, an architect might recommend the use of certain materials for the client’s new building. If those materials end up wrecking the building, the client could sue for negligence. Professional liability insurance would help cover the architect’s legal costs. The same concept could apply to an advertising professional who fails to have an advertising campaign ready on the agreed-upon due date.
It’s important to distinguish the difference between professional liability insurance and general liability insurance. While the former exclusively covers financial losses, the latter covers physical injury, physical damage, or injury via malicious advertising.
What Is Product Liability Insurance?
If your small business sells physical products and works with manufacturers, you should undoubtedly look into product liability insurance. Busy manufacturers tend to commit careless errors when making or packaging products. The product’s label, however, shows only the name of your company. Your customer could sue you, but product liability insurance would help cover your legal costs.
Many providers offer product liability insurance as an add-on to their general liability package. It’s almost among the cheapest types of business insurance, costing 26 cents for every $100 you earn in sales. For example, let’s say your company sells $100,000 in products per year. That would make your annual product liability insurance premium just $250.
What Is Employment Practices Liability Insurance?
Also known as EPLI, this type of business insurance covers your business’s legal costs when employees file specific employment discrimination or wrongful termination lawsuits. Examples include sexual harassment or racial discrimination lawsuits, both of which can easily cost your company over $100,000.
You might think that only big companies have to deal with these problems. But small businesses present more vulnerability to wrongful termination lawsuits. Many of them don’t have human resources departments, so the reasons for an employee’s termination might seem unclear.
Numerous factors can affect the annual cost of EPLI, including the size of your business, employee turnover rate, and previous wrongful termination lawsuits.
What Is Key Person Insurance?
The death of an owner or executive can have devastating financial consequences. In addition to income, the business could lose longtime clients who refuse to work with the new leader. Key person insurance provides financial security when death or serious illness strikes the business owner or any other “key” individual.
Common uses for these payouts include hiring and training new executives, paying off debts, or even paying employees amid the lack of revenue. It’s difficult to imagine big companies experiencing this kind of chaos after their owner’s death, but it honestly happens all the time. Plenty of business owners maintain complete control of their operations until their deaths, even as they enter their golden years.
The amount of coverage you need depends on how many “key” individuals your business has, how much money you’d lose should they die or become ill, and how long it would take the company to recover. If that doesn’t give you an answer, you might want to follow the general recommendation of purchasing eight to ten times the key individual’s salary.
How To Purchase Small Business Insurance:
The average small business does not need to purchase all (or even most) of the types of insurance mentioned above. Again, many companies do perfectly fine without buying any packages aside from those required in their states. For some businesses, the need to purchase additional packages didn’t arise until they started working with people who made them think, “Wow, this guy might sue me if I screw up.”
Your insurance broker or business lawyer will ultimately help you make this decision. But if you can’t envision any of the previous misfortunes happening to you, you’re probably right.
Earlier, we mentioned that countless businesses don’t even consider additional insurance solely because of the notoriously complicated process of finding the right plan. So, let’s explain what that process looks like. You might have to go through the initial stages to ascertain what you need or don’t need.
Talk to Your Competitors
Guides like this give you an idea of which types of coverage may apply to your industry. You won’t know for sure, however, until you speak to owners of other businesses in your industry and general area. They will tell you which packages belong to most of your immediate competitors, as well as what kind of misfortunes or legal issues to watch out for. You might get the impression that you need to purchase specific packages to meet your area’s standards for legitimacy.
Hire an Insurance Broker
It’s easy to get overwhelmed when shopping for insurance packages on your own. The massive array of options on top of your already hectic schedule can cause you to make the wrong choice. But if you hire an insurance broker, you won’t have to worry about not finding the right package for your needs and an appropriate price. Brokers can also quickly weed through the excessively pricey options and find others that meet your budget.
Your broker will present several quotes for annual costs, monthly premiums, and deductibles after some time. Most business insurance packages have deductibles that you must pay before the actual coverage begins. Higher deductibles, however, usually mean lower monthly premiums. You should only purchase when you have considered every last detail, like coverage limits.
Stay Up to Date
Your broker will make sure that you update your plans as your business grows. But as the business owner, you should also stay wary of how your current coverage compares to your business’s current status. For example, your broker might advise you to upgrade your product liability coverage before adding new products to your selection.
Business insurance policies typically expire after one year. Within that time frame, you can either upgrade your policy or switch to another provider. Or, you can renew when the year ends. Either way, don’t let your current policy expire without another one ready to go.
The Real Case for Small Business Insurance
In sum, small business insurance revolves around risk. The more risks your business takes, the more you should look into related insurance packages. Should one of those risks not go your way, you’ll have a much, much easier time recovering with the help of insurance. And if there’s one thing every business owner needs to succeed, it’s peace of mind.