It’s the only thing you pay for that you hope you never have to use and the type of thing you only think about when you need to use it.
It’s never a fun topic and usually left last or left off of the business planning process, but it’s incredibly important to protect your business and your personal livelihood to make sure you have the right insurance in place.
Insurance can get very complicated, but in the simplest of terms, insurance is you paying a company to take a certain amount of financial risk off your plate for the unexpected, and potentially costly, catastrophes that may come up as you run your business.
You won’t necessarily need all the types of insurance I’m about to go over below, but keep this list filed away as you may find you’ll need more and more of it as your business grows:
What it is: This is the insurance we are probably most familiar with. It’s one of the first perks you learn about when you get your first “real” job and one of the first perks you miss when you decide to quit said job to work for yourself instead.
Health insurance covers doctors’ visits, hospital stays, prescription drugs, and, more often than not nowadays, mental health services.
Since Obamacare, options for solo entrepreneurs have become more affordable, but this insurance is usually the most costly because of the potential frequency that you will use it. You can keep costs low by taking on a higher deductible and opening a Health Savings Account so you can take a tax deduction on your medical expenses paid out of this account (most big banks have them, mine is at Wells Fargo).
If you have at least one full-time employee, you can also look into getting small business health insurance.
When you need it: The penalties for not having health insurance are going up every year. In 2016, the penalty is 2.5% of your household income, or $695 per person, whichever is higher.
Open enrollment for individuals ends on 1/31/16, but there are a few exceptions. Small business health insurance has no open enrollment period so you can sign up for that at any time. Medicaid also has no open enrollment period if you qualify for this coverage.
There are also special enrollment periods for major life changes, like marriage, a new child, or a huge loss of income.
Where to get it: You can start at healthcare.gov. Many states opted to use the federal government’s site, but some states, like New York, have their own healthcare exchanges.
What it is: Disability insurance essentially protects your income, in case something were to happen to you and you couldn’t work for an extended period of time.
There are two kinds of disability insurance: short term and long term. They are exactly like how they sound.
Long term disability usually kicks in after 90 to 180 days, depending on the policy. It will cover up to 60% of your income, and, if you’ve been paying the premium, the disability income will be tax free.
Short term disability covers the first 90 or first 180 days, usually after about a week or two of not working. It can cover up to 100% of your income in some policies, but most likely will cover 60%.
When you need it: If you are someone who needs to work to make income and do not have a passive stream of income to support you if you could not work, then you need disability insurance!
Short term disability is usually much more expensive than long-term disability, so you can also “self-insure” a short-term disability by having 3-6 months’ worth of living expenses saved up.
Where to get it: If you just want to start with a basic policy, Freelancer’s Union has a great group disability policy with very low rates (I use them myself!). The policy covers up to 2 years of disability and you can choose between 30 days and 90 days before the disability insurance kicks in (called a waiting or elimination period).
If you want to protect more years of income or want to add some bells and whistles like inflation protection, you can get an individual policy through an agent. If you don’t know where to go, I recommend Low Load Insurance Services.
The reason I love them is because while most insurance agents are paid based on commission (i.e. they have incentives to sell you more insurance than you need), the staff at Low Load Insurance are all salaried so you get the same excellent service no matter how big or small your insurance need is.
BUSINESS OVERHEAD EXPENSE (BOE) DISABILITY INSURANCE
What it is: BOE Disability insurance covers the expenses it takes to operate your business if something were to happen to you. It will basically pay to keep the lights on. It can cover things like rent, utilities, equipment maintenance, office supplies, employee salaries, accounting fees, professional fees, etc.
When you need it: If you run a business where you are driving most of the revenue (i.e. you’re the main person bringing in sales/money/clients), but you have staff, office space, and equipment that you need to maintain to keep the business running, you should consider getting this insurance.
Where to get it: This is the time to get a referral from a fellow business owner. Ask around to see if you can find a local insurance agent who specializes in placing these types of policies. Most insurance agents who work for big carriers can usually sell BOE insurance, but they may not be experts at getting you the coverage you need.
GENERAL LIABILITY INSURANCE
What it is: General Liability, also called Business Liability Insurance, is basically the I’ve-fallen-and-I-can’t-get-up-on-your-property-and-you-have-to-pay-for-it insurance.
If someone hurts themselves while on your property, they have the right to sue the business. If you damage someone’s property, including losing their data, you will be liable to pay for it. If someone finds out you’ve been talking sh*t about them, they can sue you for slander.
General liability will cover the cost of replacing property, attorney’s fees, and any settlement cost up to the policy’s liability limit for any of these incidents. Whew.
When you need it: Most small business owners, even solo entrepreneurs, should consider getting this coverage. It’s not very expensive and can provide some good piece of mind.
Where to get it: Property & casualty brokers who offer business policies can often get a general liability policy in place for you. If you got a guy, ask them about this insurance. If not, Hiscox is a great company that is also very inexpensive since they do such a high volume of coverage. Even Freelancer’s Union recommends them.
BUSINESS OWNERS POLICY:
What it is: Sadly, general liability only covers you if you damage other people’s stuff. Your stuff is only covered if you have a business owners policy.
A business owners policy will cover your actual stuff (equipment, office furniture, office supplies, etc.), any data you need to protect, and employees potentially stealing any of it.
Luckily, most business owners policies also include general liability so you don’t have to get both!
When you need it: You really only need this if you run an office or have a lot of property or data to protect, and have employees.
Where to get it: Hiscox can also place business owners policies.
ERRORS & OMISSIONS POLICY (E&O):
What it is: I love that most insurance policies are usually named after the thing they protect. E&O insurance (also called professional liability, way less self explanatory) covers you in case you mess something up or leave something out, usually in a proposal, legal document, analysis, report, or any other service you’re providing for a client or customer.
You can even cover yourself for work you’ve done in the past that might be coming back with a vengeance out of nowhere.
When you need it: If you provide any kind of advice, consulting, or analysis for clients, you should have E&O insurance.
Where to get it: This is where it can get tricky. Yes, Hiscox offers it (what don’t these guys do, eh?), for most professions, anyway. They tend to draw the line at high-risk or high-error professions, so you’ll have to check with them to see if they can cover what you do specifically.
Note on above recommendations: Pam, a fee-only planner, which means all the companies she recommended aren’t paying her. She just genuinely likes them! Yay!
Pamela Capalad is a Certified Financial Planner™ and founder of Brunch & Budget, a financial planning service that makes talking about your money less scary and more delicious. She loves helping entrepreneurs and freelancers streamline their financial lives so they can focus on growing their businesses.
For More Money Management Advice:
- Year-End Tax Planning for Freelancers and Small Businesses
- 5 Ways to Manage Your Working Capital
- How to Crush Your Revenue Ambitions This Year
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