Depending on who you ask, insurance generally is either the best or worst financial product you’d ever buy. As a result, there is some confusion around what insurance policies are good to get and what is excessive or irrelevant. My goal is to be agnostic to specific insurance policies, but decisive on managing risk. Here are a few different types of insurance that can manage risk as a business owner. This list does not cover every type of insurance, and there may be other types more applicable to your situation. Think of this as a starting point to cover the basics, and then work with a quality insurance agent to tailor it to your situation.
Why is Insurance Important?
Whether it is business, life, or property insurance, all insurance is designed to manage certain risks. Home insurance is designed to help cover costs for damages to your house. Life insurance is meant to give financial relief to your family. If you are worried about the risks you are exposed to, then insurance could be a great solution. On the other hand, insurance can definitely get to a point where the cost outweighs the benefits. Since the Government requires us to have certain kinds of insurance (car insurance, unemployment insurance, etc.), we should focus on what types of insurance as well as how much of it is necessary.
For example, let’s consider life insurance for two different people. Imagine a 40 year old business owner, with young children and a spouse who stays at home. If she tragically passed away today, the family would almost certainly not be able to maintain their lifestyle, without additional money. The risk to the family is too large. Now let’s consider a retired person. He is 60, kids are out of the house, has no debt and no one else that depends on his income. Financially speaking, there is no need for life insurance. If he wants life insurance (maybe for funeral arrangements or to leave cash to someone), that is another conversation.
Continuing our example, how much life insurance is appropriate? Well, the retired person’s decision is easy. They need zero. For the business owner, it will depend on the details. If you want to pay off all debt, then your policy should be at least as large as your outstanding debt. If you want to put your kids through college, factor that in as well. This is when working with a quality insurance agent and a financial planner comes into play. Whether it is life insurance or any other type, you will want to tailor the amount to your specific needs and goals.
Types of Personal Insurance
Life insurance is one of the most popular types of personal insurance. Protecting your family and your dependents from your death (at least financially) is a great start to getting your “affairs in order”. But there are other personal risks you may want to mitigate. Perhaps as important is health insurance. Certain people have varying levels of flexibility with their health insurance, so understand your policy and your coverage. Access to HSAs and other health-related accounts are extremely valuable to help cover risks related to your health.
On the topic of health, the Social Security Administration claims that every person in their 20’s has above a 25% chance they will become disabled before retirement.1 Disability insurance is another common type that people gloss over. and it’s rather surprising how few people have a disability policy. Some people have employers who provide access to disability insurance, while others buy it individually. For working professionals, the greatest asset they have is their future earnings. Ten years of salaries could be multiples of the value of cars, homes, and other assets they already insure. If there are dependents in the picture that rely on the income of a working person, then disability insurance should be considered.
I won’t go too far into homeowners (or renter’s) insurance, car insurance, and other property insurances. Most people have a basic understanding of each, so take the time to review your policies and update them if needed. What people may not immediately know is that some of these property policies also include liability coverage. For example, if you hit someone on the golf course, your homeowners policy can cover the damages you caused. This raises an important point, you should know how much liability insurance you have, and whether or not you need more. How big of an accident could you get into that your liability coverage in your auto policy won’t fully cover? Recently, more and more people have adopted umbrella insurance to help with these scenarios. These policies sit on top of every other policy and help protect you from catastrophic scenarios that exceed your normal insurance.
Types of Business Insurance
You may have noticed most of the personal insurance risks overlap with business related risks. Health insurance, life insurance, property insurance (like cars, equipment, etc.) all can have “commercial” and “personal” versions. Life insurance especially, whether for the owner, between partners, or on employees, is something worth considering on both the business and personal side. The exact policies needed are specific to your situation. Businesses do, however, also have some unique risks where owners would want to separate their personal financial life from their business. Here are a few examples:
The most common policy is the Business Owner’s Policy, or BOP. This policy wraps up three of the major types of business risk into one policy. Instead of three different policies, you generally receive business property, general liability, and business income coverage all together. Business property insurance helps protect buildings, tools, equipment and other assets used in the business. General liability covers the business and assets in certain lawsuits like negligence or injury. Finally, business income insurance helps pay the bills if the business has to close temporarily.
Outside of the typical BOP, there are many other types of insurance worth reviewing. Crime insurance can help protect businesses from fraud or theft. Errors & Omissions insurance helps cover professional mistakes made on the job. Cyber insurance can protect against data breaches. Another two types of required insurance (at least in almost every state) are worker’s compensation and unemployment insurance. There are rules and regulations to follow with each to qualify for the requirement, but ensure that your business is up to date, especially if you have multiple employees.
A Mile Wide and an Inch Deep.
Getting properly insured is a large task, both on the business side and the personal side. It is important to take the time and walk through each of the risks you, your family, and your business are exposed to. Simply put, the goal for every insurance policy would be to waste money paying for it. I hope you never claim your life insurance policy, and instead “wasted” those dollars. but ask any widow or ask any person with a disability how it could have been different (with or without the financial help). We can’t replace the tragedy of life, and we can’t stop people from hurting others or stealing, but we can be prepared and not let those events become worse than they are.
TC Falkner 