Guide to Insuring Your Business
Presented by Kris Maksimovich, AIF®, CRPC®:
Insurance coverage is available for every conceivable risk your business might face. Below, you’ll find an overview of the four main categories of business insurance, as well as tips for evaluating a policy.
Types of business insurance
Although your insurance needs depend on the type of business you operate, all business owners should identify their unique risks in the four categories described here.
Damage to business property. Property and casualty insurance (P&C) covers damage to the building where you do business, whether owned or leased, and its contents (furniture, equipment, inventory, and so on). Depending on the policy, P&C insurance may cover damage to customer property under your care. A comprehensive package can also include business income insurance (sometimes called business interruption insurance), which covers financial losses should the business become inoperable.
Keep in mind that a basic P&C policy may not cover theft or the expense of reconstructing valuable papers and records. It probably will not cover environmental liability that exists on your property. You may also need an additional policy for company cars or use of a personal car for business reasons. These types of coverage can be added as endorsements to a P&C policy or as stand-alone policies.
Damage to others. Liability insurance covers damage caused to others by your business activities or by your employees. In general, it covers the cost of your defense if a lawsuit is brought against you. Commercial general liability insurance usually covers injuries to customers or others on your premises, but it can be customized with endorsements or additional policies to fit the size and type of your business. Additional coverage options to consider include:
- Product liability
- Errors and omissions
- Directors and officers
- Manufacturers and contractors
- Professional liability
- Employment practices, such as harassment, discrimination, and similar risks
Just as with personal insurance, an umbrella liability policy offers additional coverage in excess of your base policy, up to a specified limit. Umbrella policy premiums can be surprisingly affordable for the value they provide.
Employee benefits. If you have employees, your state likely requires you to obtain workers’ compensation insurance. Workers’ compensation insurance helps cover medical expenses and lost income for employees who are injured on the job or who acquire work-related illnesses. (It is different from disability insurance, which partially replaces an employee’s income as a result of non-work-related injuries or illnesses.) A few states require business owners to provide health insurance for their employees. In addition, many employers allow employees to defer part of their salaries to pay for higher levels of life and disability insurance coverage or additional benefits, such as long-term care insurance.
Loss of key persons. If a key person involved in a small business dies or becomes disabled, it can seriously disrupt business operations and profits. Banks may pull back lines of credit, suppliers may require payments upon delivery, and customers may hesitate to place orders if there is a chance the business won’t survive. A type of life insurance policy—key person insurance—provides cash to replace lost profits or to find a replacement for an employee with a particular skill, talent, or contacts. Key person insurance can also be used to repay business loans.
Business owners should also consider overhead expense disability insurance, which helps cover operating expenses like rent, salaries, insurance, utilities, and maintenance costs if you become disabled. Another important coverage option is buy-sell insurance, a type of life insurance policy that provides cash to buy out a disabled or deceased business owner.
Because some types of life insurance accumulate tax-deferred cash values, they can also provide supplemental retirement dollars in the form of deferred compensation or an executive bonus. These policies can be owned by the business to fund future compensation or owned by the employee but paid for by the business.
A note on home businesses
Many start-ups are based in the entrepreneur’s home. If you’re operating out of your home, don’t assume that your homeowners’ and automobile policies will cover your business risks. For a reasonable premium, your insurance carrier can add an endorsement to your homeowners’ policy or issue you a home office policy that offers a broad range of coverage for additional business risks. If you use your personal vehicle for business, ask your insurance agent if you need a commercial policy.
How to evaluate business insurance
Selecting a policy requires more than comparing premiums. Be sure to take the steps below before purchasing a policy.
- With your insurance agent’s help, select the type and amount of coverage. A good commercial insurance agent can evaluate your business and identify risks you may not have thought of, such as cyberspace liability or environmental pollution.
- Decide how much risk you will self-insure. Self-insurance could take the form of higher deductibles, a side fund for small but infrequent claims, or risk avoidance techniques. For example, your business might underwrite the cost of 13 weeks of disability benefits for employees but purchase insurance for longer disabilities.
- Review a specimen or sample policy. Even so-called comprehensive policies have coverage gaps. Review the scope of the coverage and any exclusions, taking care to distinguish between “claims made” and “occurrence” coverage. With a claims-made provision, only claims reported while the policy is in force are covered. While these types of policies are less expensive, it’s common for a liability claim to arise several years after a business error happens. Occurrence policies cover claims for events that happen while the coverage is in place, even if the claim comes later. This can be particularly useful after you retire from your business and no longer maintain liability insurance.
To learn more about business insurance, visit Insure U for Small Businesses at www.insureuonline.org/smallbusiness. Sponsored by the National Association of Insurance Commissioners, the site provides important tips for evaluating and purchasing insurance for your business.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Kris Maksimovich is a financial advisor located at Global Wealth Advisors 18170 Dallas Parkway, Suite 103, Dallas, TX 75287. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (972) 931-3818 or at firstname.lastname@example.org.
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