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Small Business Insurance: The 10 Types You May Need
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Starting a small business comes with risks, so you should protect yourself from liability as soon as possible. Several types of business insurance are available so that you can customize the coverage for your company.
Business owners generally need liability protection to avoid responsibility in any lawsuits, property insurance to protect the building and business interruption insurance to keep money flowing during an emergency. You can get this fundamental coverage in one policy. We’ll help you figure out what common types of small business insurance is right for your business.
10 types of small business insurance
To protect the nuanced aspects of your business, you may need to purchase additional policies. If you have employees, there are a few types of coverage that you could be legally required to obtain. You also may be legally required to buy certain kinds of insurance based on state laws.
When lining up insurance for your small business, consider choosing from the following types of policies.
1. General liability insurance
General liability insurance provides coverage that protects businesses from property damage and bodily injury claims, as well as certain medical expenses. This insurance covers legal costs from lawsuits involving claims of false advertising, libel and slander. It protects you if there is damage to your rented property as well. Businesses are not legally required to have general liability insurance, but purchasing a policy could protect your business and personal assets from being seized if a judgment is taken against you. A professional liability insurance policy could give you additional protection from lawsuits related to financial loss resulting from your professional services.
2. Commercial property insurance
If your business owns or leases the building in which you operate, you may want to purchase commercial property insurance. A policy would protect the business property, as well as tools, equipment, inventory and furniture. You can adjust your coverage to reflect your business’s specific property risks.
3. Business income insurance
Business income insurance, or business interruption insurance, is typically tied to a commercial property insurance policy. It protects your assets if business operations are suspended or delayed because of theft, fire damage or other reasons specified in your policy. Business income insurance would allow you to continue making payroll and paying bills while repairs take place.
4. Disability insurance
Group disability insurance protects your employees if they can’t work. Disability benefit plans typically let employees access a certain percentage of their income to cover personal expenses while they’re not working. As the business owner, you can deduct any pre tax company-paid premiums. Five states require businesses to offer a short-term disability plan: California, Hawaii, New Jersey, New York and Rhode Island.
5. Unemployment insurance
Nearly all business owners are required to have unemployment insurance. State and federal taxes fund unemployment insurance programs. Unemployment insurance provides income for eligible workers who are out of work. Unemployment taxes vary by state, and your rate is dependent on your former employees’ history of unemployment claims. For example, the maximum unemployment tax rate in Florida was 5.4% in 2017, compared with 12% in Wisconsin in the same year.
Some business owners may be exempt from unemployment tax. The IRS would only require you to pay unemployment tax if you paid more than $1,500 in wages during a calendar quarter or if you had one or more employees work at least part time during 20 or more different weeks throughout the year. Nonprofits with 501(c)(3) tax status are exempt from federal unemployment tax.
6. Workers’ compensation insurance
Workers’ compensation insurance gives employees medical and wage benefits if they get hurt or sick on the job. Workers’ compensation insurance is regulated at the state level. The insurance protects business owners from civil lawsuits that employees could file if they’re injured in the workplace. Your business type, location and history of workplace injuries, among other factors, would determine the cost of a workers’ compensation policy.
7. Employment practices liability insurance
Employment practices liability insurance, or EPLI, protects businesses against claims from employees that their legal rights were violated in the workplace. These types of lawsuits can affect large and small companies. An EPLI policy would cover the expense of a lawsuit resulting from claims of sexual harassment, discrimination, wrongful termination, breach of employment contract and wrongful discipline, among others. Though a policy would cover legal costs, punitive damages or civil or criminal fines are often not included. The cost of a policy would be based on your type of business, number of employees and risk factors like past employment lawsuits.
8. Product liability insurance
If your business sells products, consider purchasing product liability insurance to account for the risk of dangerous defects. Product liability insurance would protect your business in the event of a lawsuit resulting from a product defect that caused bodily injury or property damage. Your business would be responsible for making things right with affected consumers. The type and number of products you sell would determine how much coverage you need.
9. Business vehicle insurance
If you have a vehicle that you primarily use for business purposes, you’ll likely need insurance coverage beyond your personal auto policy. A personal policy could exclude claims occurring during a business endeavor, such as an accident happening while you’re on the way to a business meeting or making a product delivery. A business auto policy should provide collision and comprehensive coverage for cars, vans, trucks, trailers and other vehicles the business owns.
10. Key employee insurance
Key employee insurance provides financial support if a significant employee dies or becomes disabled. Although it is a form of life insurance, the business would be the owner of the policy. The business owner would pay the premiums but would have the right to transfer, sell or change the terms of the policy. The employee must agree to the business’s purchase of the policy and be involved in the process. The policy should cover the key employee’s financial contribution to the company.
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Choosing the right small business insurance
You can break down the process of buying business insurance into a few simple steps:
- Evaluate your risk: Consider the potential dangers to your business, such as natural disasters or workplace accidents. Your business’s primary risks would inform your policy purchases.
- Work with a licensed insurance agent: An agent could guide you through the purchasing process to help you buy enough coverage. Agents typically receive commission from insurance companies when they sell policies, so be sure to find an agent who has your best interests.
- Find the best price: Insurance rates can vary by provider. It’s best to compare prices, terms and benefits included in multiple offers. Shop around before settling on an insurance provider. The SBA provides guidance to help small business owners determine how much they should spend on policies to protect their business.
- Assess your coverage annually: As you grow your business, your liabilities and risks may evolve. If you make changes like expanding your operation or purchasing new equipment, you may want to consider adjusting your insurance coverage.
A package policy may be an attractive option if you need a number of different policies. Insurers often bundle policies to sell as a single contract, and the cost could be lower than if you made separate purchases. Insurers may package policies for certain types of businesses or industries, like restaurants or hair salons.
A business owners policy (BOP) combines property, liability and business interruption insurance in a single policy. A BOP would protect your building and the contents, and you would be protected from liability if a defective product or a mistake in service causes harm to others. Damage from natural disasters would generally be covered in a BOP as well.
Small- or medium-sized businesses can be eligible for a BOP, depending on factors like the business location, financial stability and building features. A BOP provides basic coverage and is fitting for many small businesses, but you would have to add policies if you need more specific coverage.