Insurance protections for small business owners

If you’re a small business owner, you probably have big dreams — and a business plan to help you reach them. But those business plans rarely include all the insurance protections a business owner may need. Having adequate protections in place not only can help your business flourish, but also can help protect you and your family from financial risk.

Here are some key insurance protections to consider adding to your plan.

Business owner policy (BOP)

This is a typical package of coverage that addresses some basic and important needs of a small business owner. This package includes:

Liability coverage: This provides defense and damages protection if you, your employees, or products and services cause bodily harm to a third party.¹

Property insurance: This policy covers business property, such as buildings, equipment, computers, and inventory, from losses due to fire, vandalism, theft, smoke damage, etc.

Business interruption insurance: This provides income when events prevent you from conducting business.

Vehicle coverage: This is for vehicles that the business may own, or for when employees use personal automobiles for business purposes.

Workers’ compensation: This insurance covers employees who are injured on the job with wage replacement and medical benefits. In exchange for these benefits, employees forfeit the right to sue. All states require this coverage and levy stiff penalties for noncompliance.

While a BOP provides basic coverage, you may want to consider other insurance policies to further protect yourself and your business.

Professional liability insurance

Also known as errors and omissions insurance, professional liability insurance provides you with defense and damages if you fail to provide, or improperly render, professional services. A general liability policy doesn’t cover this risk, and this coverage is typically for professional firms, such as lawyers, accountants, consultants, and real estate agents.

Data breach insurance

With unending stories of business data being compromised by hackers, if your business has sensitive or non-public information — whether digital or on paper — your business can be held responsible if this information is stolen. Having data breach insurance can help protect you from this risk.

Buy-sell agreements

If you are in business with one or more partners, your business may want to consider a buy-sell agreement. If one of the partners passes away, this agreement provides for the remaining partners to buy out the deceased partner’s share from the surviving spouse. As a result, the remaining owners can avoid any complications of taking on the surviving spouse as a partner.

Whole life insurance

Sixty percent of Americans cited “burial and other final expenses” as a reason to own life insurance, but life insurance has a lot more benefits than people think.² One key difference between a whole life insurance policy and other types of insurance is its cash value component. As premium payments are made into a policy, the cash value grows, tax deferred.^3,4 One of the advantages of the cash value is that a policy owner can make a withdrawal in the event of an emergency or something unexpected that could arise for a small business.⁵ Thus, life insurance on the lives of each partner can provide the necessary funds to complete the agreed-upon buyout.

With the cash value from whole life insurance, you can help pay for big expenses, such as medical bills during emergencies, lost revenue during a natural disaster or a slow quarter, funding a business expansion, etc. One study estimates the total cost to hire a new employee can be 3 to 4 times the position's salary, so this reserve can help you manage that cost.⁶ Or if you have a valuable employee, such as a superstar salesman whose loss would take considerable time for the business to recover from, the proceeds of a life insurance policy on a key employee can act as a financial bridge until you bring on someone new.

Disability insurance and income protection policies

Many business owners are familiar with the types of insurance they need for their business but overlook the fact that they need to protect themselves personally to keep the business on track for the long term. As a business owner, you don’t have the benefit of obtaining group disability insurance through an employer and it’s up to you to acquire your own disability insurance. When you do, you get the relief of knowing you’re covered if you have a sudden health emergency.

As you’re protecting yourself, don’t forget about your spouse as well. While you build your business, does your spouse handle important responsibilities at home? A 2019 study found that if stay-at-home parents were paid for all that they do, their annual salary would be over $178,000 a year.⁷ Increasingly, insurance companies are recognizing the value of stay-at-home partners through spousal coverage policies. If your partner gets sick or injured and can’t contribute to the household for some time, an income protection policy can help your household get through the hardship. Our home lives are the foundation for everything else and with this supplemental income, you can spend your time on your business — and on helping your spouse recover.

Reach out to a financial professional

You’ve worked hard to build your business, and you want it to thrive for a long time to come. Whether you’re looking to integrate a whole life policy into your business strategy or thinking of acquiring disability insurance for yourself, talk with a financial professional about the optimal insurance strategy to help ensure you’re properly protecting both yourself and your business.