Budgeting for Safety: An Guide to Small Business Insurance Costs

small business insurance costs

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When you run a business, you need to budget for small business insurance costs. Insurance is financial protection from loss types that can happen while running a business, including third-party claims of injury, property damage, employee injury, or theft.

The insurance you choose will depend on your business and what kinds of risks you face. While most businesses with at least one employee are required to get workers’ compensation insurance, most insurance policies are optional. 

However, the fact that insurance is optional doesn’t mean it isn’t necessary. As you shop for insurance, you’ll find that budgeting for the right types of policies is important. Here’s a look at what some of the most common policies might cost you.

Table of Contents

    How Much Is Business Insurance?

    Insurers tailor their business insurance policy to individual businesses, and factors such as coverage type can influence pricing. However, many business insurance companies cite a starting premium used for lower-risk small businesses.

    The cost of a small business owner’s policy, which is a package of coverage that many businesses need, can start as low as $300 annually based on our team’s research. But the annual revenue or annual premium your business pays will depend on factors like your location and industry. The coverages you choose and any endorsements you add will also influence your cost. 

    Cost is an important consideration when choosing an insurance company, but the cheapest option may not be the best fit for you. Companies’ ratings and customer reviews vary, some provide more digital tools than others, and some policies may have gaps in coverage while others come with needed endorsements. It’s important to consider all these factors when comparing business insurance quotes. 

    What affects your small business insurance costs?

    While insurance type affects the price, many other factors will cause your premiums to go up or down. Every business is unique, which means you likely won’t see two businesses with the same insurance premium unless they qualify for the base or minimum premium.

    Factors that affect small business insurance costs

    Consider these factors when getting quotes for small business insurance:

    • Industry

    Insurance carriers will want to know what you do so they can classify your company correctly for the insurance you’re purchasing. Keep in mind that specific industries have higher risk factors for some policy types. For example, a doctor’s professional liability coverage policy costs more than a tutor’s because a doctor’s mistake can cost someone their life, while a tutor’s error might lead to someone failing a test.

    • Location

    Where your business location operates will affect your insurance rates. Insurance is regulated at the state level, and insurance carriers price policies based on the claims history of your operational area. This means that the insurance company may break down costs by ZIP code, using city and county claims data to determine how much of a risk it is to run a business in that location.

    • Years in business

    Insurance companies gain confidence in companies that have been operating for years. The longer you’ve been in business, the more likely you are to operate in a safe, responsible way. For new companies, management experience can also affect the rate, with lower rates for managers knowledgeable in the industry, thus reducing risk. 

    • Property owned.

    Your business assets will determine how much business property coverage you’ll need. These assets include inventory, supplies, materials, and business equipment. Businesses don’t often think about how much it would cost to replace all their office furniture and equipment, but that’s precisely what would happen after a total loss. Business insurance needs to take your business property into account.

    • Number of employees

    The more employees a business has, the more exposure it must risk. This is especially true when it comes to workers’ compensation. The more employees on the payroll, the higher the probability that someone will get hurt on the job for some reason. 

    • Revenue

    Revenue is another risk indicator. The idea is that the more you earn in sales, the more exposure you have to the public. This higher exposure increases your chances of a claim, and the higher your revenue, the more you become a target to claims in which third parties seek big paydays from deep-pocket companies.

    • Payroll size

    Payroll costs are used to calculate your workers’ compensation premium. The workers’ compensation equation multiplies every $100 of payroll times the job classification and your company’s claims history. As the amount of payroll, your process goes up, so does the premium.

    • Claims history

    All insurance policies will consider the company’s claims history. The more claims you have, the higher your premium, because you’re considered a higher risk than a company with no claims. Insurance companies see claims as a trend, and a company with claims isn’t trending in the right direction. Claims-free companies may receive a discount if they’ve gone without a claim for several years.

    • Coverage selected

    If you select more coverage, you’ll pay more in premiums. However, it’s important to point out that double coverage for something like a general liability policy won’t cost twice as much, although it will be more expensive. Get quotes that adequately cover your financial risk to determine if the cost falls within your budget.

    • Key takeaway

    Even businesses in the same industry will have unique factors affecting their insurance rates. You likely won’t see two businesses with the same insurance premium.

    Types of Business Insurance

    General liability insurance: General liability insurance coverage costs cover legal fees and judgments for lawsuits related to bodily injury, personal loans and advertising injury, and property damage because of non-professional negligence.

    • Commercial property insurance: Covers rebuilding, repair, or replacement of buildings and their contents and equipment after a covered peril, like a fire or vandalism.
    • Business interruption insurance: Helps pay for ongoing expenses and debts as well as replace lost business income from the business income insurance after a covered event, like a windstorm.
    • Business owner’s policy: A business owner’s policy is a package of coverages that includes general liability insurance, commercial property insurance, and business interruption insurance.
    • Professional liability insurance: A professional liability policy covers legal fees and judgments from lawsuits brought by customers claiming professional negligence, such as inaccurate advice or misrepresentation.
    • Workers’ compensation insurance: Required in most states for businesses with a certain number of employees, workers’ compensation insurance pays for medical bills and lost wages if an employee is injured or becomes ill while working. It typically also protects the business from employee lawsuits related to injury. 
    • Commercial auto insurance: Commercial auto insurance covers medical bills and repairs to property for the other party in an accident and can also pay for injuries to the driver and physical damage to the vehicle owned by the business.
    • Hired and non-owned vehicle insurance: Works like commercial auto insurance, except that it covers personal loans or rented vehicles operated for business purposes.
    • Inland marine insurance: Covers inventory and equipment you transport to job sites or ship to customers.
    • Cyber liability insurance: Cyber liability insurance covers liabilities, recovery of reputation and lost data, lost business income, and other consequences of a cyber insurance breach

    How To Save Money on Business Insurance

    Compare quotes: Some insurance providers may offer the coverage you need for less than others. So, it’s important to compare business insurance quotes on a site before choosing a company. However, bear in mind that price isn’t the only consideration. Make sure the company has good financial strength and customer satisfaction ratings.  

    • Bundle your coverages: Many insurers offer bundling discounts when you buy two or more policies. You can also save by buying pre-packaged coverages, like the business owner’s policy. 
    • opt for a higher deductible: The deductible you choose represents your share of the financial responsibility for a claim. Choosing a higher deductible means you’ll have greater out-of-pocket expenses if a loss occurs, but it can save you money on your monthly premiums. 
    • Be proactive about preventing losses: Since your claim’s history can affect your premiums, you should take steps to limit your risk. Your insurance company will likely have resources available and may even provide training to help your business prevent costly incidents. 
    • Update your coverage as needed: Keep your insurance company informed about changes to your business. If you expand your service area, hire more employees, or acquire another entity, you’ll likely need to add more coverage to protect your business. If you need to lay off employees or close a location, you should also update your coverage to save money on your premiums. 
    • How Much Is Liability Insurance for a Business?

    The cost of liability insurance for a small business varies depending on the type of work your business performs, where your business operates, your past claims history, and the limits you choose for your policy. Some small, low-risk businesses may pay $200 or even less per year for general liability insurance cost and $300 or less per year for professional liability insurance.

    How Much Insurance Coverage Should a Business Have?

    The Small Business Administration suggests that businesses buy business insurance for anything they wouldn’t be able to cover on their own.

    The U.S. Chamber of Commerce notes that you should ensure the full value of your business property and buy enough liability coverage to protect your assets, which means you’ll need higher coverage limits for a sole proprietorship and less liability coverage for an LLC.

    One of the most popular options for small businesses is a business owner’s policy (BOP) with $1 million in coverage per occurrence for general liability coverage and a $2 million aggregate.

    Did You Know?

    State regulations may require workers’ compensation and commercial auto policies, but other policies are often voluntary. It’s highly recommended that small business owners carry out at least general liability policies to cover costly claims.

    How to get the lowest rates for your business insurance

    If you’re concerned about the cost of small business insurance, there are a few things that can help lower your rates. Here are five tips to lower your business insurance rates:

    • Check your industry classification; Ask the insurance company what your industry code is and confirm that it makes sense. Incorrect coding can lead to higher premiums. You may need to provide job descriptions to the insurance company to confirm that your company operates on a lower risk scale with potentially lower rates.
    • Ask for credits; Don’t hesitate to ask your insurance carrier what credits it offers. You may qualify for something that reduces your premium. For example, the insurance company may offer a credit if you have a security system in place that reduces the risk of theft.
    • Implement safety programs; This helps businesses buy workers’ compensation insurance. The insurer may offer rate reductions for businesses with a formal safety program that is reviewed regularly and implemented throughout the company.
    • Don’t file small claims. In many cases, it’s best to take care of minor incidents on your own without filing a claim. Business insurance Companies don’t always look at how much a claim costs to determine claims trends and increase premiums; they only look at whether a claim was filed.
    • Raise your deductible: If you’re going to handle minor incidents on your own, then it makes sense to increase the deductible. This is the amount you spend when there’s a claim before the insurance kicks in. Remember that the higher your deductible, the lower your premium.

    Business insurance FAQs

    Here are the most common questions about small business insurance.

    What type of insurance should a small business have?

    Identifying what type of insurance a small business should have can be tricky. Some policies, such as workers’ compensation and commercial auto, are required by state laws. Other policies, such as professional liability, could be required for licensing, but aren’t always. For example, most states require doctors to carry malpractice insurance.

    But what do you do about the policies you aren’t required to have, but maybe should? The answer comes down to risk. A business owners policy provides both liability coverage and business property coverage in one cost-effective policy. This would cover your business’s most significant risks, including fire, theft, and third-party injury or damage.

    Is Business Insurance Required?

    Legal insurance requirements for businesses vary depending on the industry and the city and state where you operate. For most businesses with employees, workers’ compensation insurance is required. For businesses that own vehicles and drive or park them on public roads, commercial auto insurance is required. Professional liability insurance is mandatory for legal and medical professionals in some states.

    Is Business Insurance Tax-Deductible?

    Generally, yes. IRS Publication 535 lists several types of business insurance that you can deduct from your taxable income, including commercial property insurance, health insurance for employees, general and professional liability insurance, workers’ compensation insurance, and business interruption insurance. However, you can’t deduct certain life insurance and annuity premiums, nor can you deduct self-insurance reserve funds.

    What Is a Business Owner’s Policy?

    A business owner’s policy is a package of small business insurance policy coverages that may vary from one insurer to the next but generally includes commercial property insurance, general liability insurance, and business interruption coverage. A BOP will not cover professional liability insurance; you’ll have to buy that coverage separately.

    Do I Need International Business Insurance?

    If your business operates in foreign countries, you’ll likely need an international business insurance policy since most policies won’t cover events that occur overseas. Whether you have international employees, customers, or suppliers, your exposure to global liability risks makes it essential to purchase a global insurance policy or multinational endorsement.

    Does a small business have to have insurance?

    In many cases, a small business isn’t required to have insurance. There are some exceptions, for example, a business with a lease may be required to purchase liability insurance.  Employers must get workers’ compensation, and some professionals may be required to get professional liability insurance.

    Also, just because you aren’t required to have insurance doesn’t mean you shouldn’t be seriously considering a policy. A slip and fall accident could cost more than $20,000. While product liability claims could cost more than $35,000. The right insurance can be the difference between an incident that’s covered and one that you pay for out of pocket.

    Why you should get business insurance for your small business.

    Claims, even minor claims, can have a financial impact on a small business. Think about a minor burglary, whose average limit is $8,000, or a customer injury claim, which might be more than $30,000. Without insurance, a company must pay for these incidents out of savings or take on debt.

    Most small businesses don’t have the resources to handle these types of claims and could go out of business as a result. Business insurance coverage covers the costs of claims so that business owners can focus on growing their businesses.