As a small business owner, you are responsible for getting the proper protection for your business assets, property, employees and the well-being of others in order to minimize the negative impact of claims against your business. No matter your niche, whether you just opened your business or are a seasoned veteran, it’s important to get your business fully covered.
This guide will cover what small business insurance is, the risks you could face, and what will happen when you have insurance in the event something does go wrong. Then we will dive into the types of mandatory insurances you are required to have and a bonus guide of all the other types of insurances you should be aware of.
What is small business insurance?
To put it simply, small business insurance is coverage that protects you from the unpredictable costs that could cause financial damages to your business. If you're a business owner, I'm sure that is the last thing you would ever want to happen. So as one of your most valuable tools for success, you need to protect yourself from the risks that could possibly occur.
What are the risks that could occur?
Usually these risks are unpredictable and least expected. It could be things like accidents, lawsuits, professional errors, theft, natural disasters or even online hackers.
If you're thinking, "wait a minute, I have an LLC or corporation so that means I'm fully protected, right?" Wrong! These business structures only protect your personal assets and even that is extremely limited. Business insurance can protect both your personal and business assets. That's why it's best to hedge your bets from the get-go by getting fully covered.
What happens when something bad happens and I have coverage?
In the event that something bad does happen (we hope it doesn’t!) and you already had coverage, your insurance provider will give you money to cover costs for damages. In return, you have to pay them either a monthly or annual premium, which is much better than having to file bankruptcy because you couldn’t cover costs for damages (and bankruptcy will dissolve your business, thus shutting you down.)
The common amount of damages business insurance will cover is about $1 million per occurrence or $2 million per year, but this also is dependent on your insurance plan.
3 Types of Mandatory Insurances
There are certain insurances that are mandatory on the federal and state level. Some states also require you to have additional insurances based on the type of your business, so make sure to check out your state’s website to learn about any requirements.
Here are the three mandatory insurances every business owner must pay.
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- Unemployment Insurance
This insurance is mandatory if you have quarterly payrolls of at least $1,500 or you employ at least one person for 20 weeks in a year. You are responsible to pay a percentage of each of your employees compensation to the federal and state government. You might have heard it called FUTA (the Federal Unemployment Tax Act) and SUTA (the State Unemployment Tax Act) taxes. You don’t actually have to purchase insurance, you just have to make sure that you withhold and pay the amounts due. If you have a payroll provider, like Gusto or Surepayroll, they will withhold and make these payments on your behalf, saving you a ton of time and a potential headache. If they aren’t paid, you could be penalized and fined.
What is it?
Unemployment insurance is a state run system that helps provide income to workers who have lost their jobs due to being laid off and cannot find another job. Although it has federal guidelines, the state actually administers the program, sets standards and determines the amount the workers will receive.
How much is it?
FUTA tax is a flat rate of 6% on the first $7,000 of wages paid per employee per year. If you pay it on time, it can be reduced down to .6%. SUTA tax rates, on the other hand, are dependent on the state of employment. The typical range is usually from 2-4%. These payments are only required to be paid by you, the employer, not the employee.
- Workers’ Compensation Insurance
If you have employees, this insurance is usually required by law in almost all states. It can be purchased either directly from your state or a private carrier. If you do not have coverage, you could likely be fined or face a lawsuit for any workplace injuries.
What is it?
Workers’ compensation insurance covers work-related injuries and lost wages for workers who have become injured or ill on the job. This insurance protects not only your employees, but also your small business. If you have proper coverage and an employee receives benefits due to an injury, that employee cannot sue you as a result of their injury or lost wages.
How much is it?
The average monthly cost in 2019 was around $85, but this is dependent on a few different variables; your employees level of risk, your total annual payroll, your location (meaning the state you live in) and your past workers’ comp claims history.
- Disability Insurance
This insurance is only mandatory in a handful of states so you’ll need to see what is required in your area so you understand how to comply within the law. Like the other two mentioned above, if it is mandatory, you will need to obtain a policy. Otherwise, you can be penalized and face hefty fines.
What is it?
Unlike workers’ comp, disability insurance benefits cover all non-work related chronic illnesses, accidents or disabilities that happen in the duration of employment. It also covers part of the pay for maternity leave. This will help safeguard your workers and their family in the event that something happens and they can’t continue to work. Although it might not be mandatory for you to have (depending on your state), it is still a good idea to have and offer to your employees. As the old saying goes, when you take care of your employees, they will take care of you. And that is good for business.
How much is it?
Usually this is paid fully by you, the employer, and can cost anywhere from 1-4% of the workers annual compensation.
Bonus Guide: Types of Small Business Insurances You Need to Know About
Choosing the right type of business insurance can be challenging especially since there are several to choose from. Here’s an outline of all the different types of insurances that are available, the average costs and much more.
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