It is essential for entrepreneurs to protect themselves and their assets. Insurance can offer benefits and a hedge against future incidents, legal issues, and emergencies. There’s a variety of business insurance options to choose from these days. Deciding what type of insurance is necessary and weighing the choices can be difficult.
A 2018 Next Insurance survey of 30,000 small businesses found that 44% of businesses in operation for at least a year didn’t have insurance. This suggests a large number of businesses are uninsured or underinsured. Also perhaps overly optimistic about the risks of doing business.
Business owners may not think they need insurance, but end up getting hurt, sick, or sued and you may think again.
The stakes are higher if you are self-employed and work independently (e.g., freelancer, consultant, coach, etc.). If you work alone, here are four types of insurance that you should definitely consider.
Disability insurance provides a payout if you suffer a disability (e.g., work injuries or chronic illnesses like heart disease) which prevents you from working. The payout you receive from disability insurance then serves as your income while you recuperate.
There are two main types of disability insurance: long-term disability insurance, and short-term disability insurance. As its name suggests, long-term disability insurance covers disabilities that last for long periods. According to the Council for Disability Awareness, that includes three years on average.
On the other hand, short-term disability insurance covers you for shorter periods of downtime–generally between 3 to 6 months).
Also, you may want to supplement disability insurance with emergency funds to cover shorter-term disabilities that last anywhere between a few days and a month. Life happens, so it’s a good idea to get your finances in order and be prepared.
Health insurance works hand in hand with disability insurance to cover you during periods of disability. While disability insurance ensures you still receive income, health insurance helps pay for medical bills.
Given the high costs of healthcare, health insurance is vital. For starters, a 15-minute office visit can set you back by $100. Chronic illnesses will burn a considerable hole in your pocket. For example, the American Diabetes Association estimates it costs diabetes patients around $16,750 annually to manage their conditions.
As a self-employed person, you will not be able to benefit from employer-sponsored group insurance. Instead, you will need to use the Health Insurance Marketplace or association health plans (AHPs) for small businesses. AHPs allow small businesses to come together within industries or geographic regions to purchase large-group coverage or self-insure.
If you are not financially well-off, have children or live with a disability you may qualify for free or low-cost health insurance under Medicaid.
Liability insurance covers legal expenses (e.g., attorney fees and settlements) that arise in the case of a lawsuit.
General liability insurance typically provides coverage for lawsuits relating to client injuries and property damage. For example, if you are a self-employed handyman who accidentally smashes your client’s antique vase while fixing her wiring, general liability insurance may cover the cost of compensation for the destroyed vase.
On the other hand, errors & omissions insurance covers lawsuits arising out of professional mistakes. For example, you may be a mobile app developer who failed to spot and fix a bug in a client’s app that later leaks private customer data. These customers may sue your client for the data breach, and your client may, in turn, sue you for compensation.
When a project is going well, your client can be your best friend. But “friendship” may not shield you from lawsuits if you cause clients loss while working with them. You may be better off purchasing liability insurance to guard against such events, especially when doing business in a litigious society like the US.
Life insurance provides a payout to your family upon your death. It is indispensable if you have a family, and especially so if you are the sole breadwinner.
Life insurance ensures your family’s immediate financial needs are taken care of upon your passing. Even if you are single, you may be required to take out life insurance if you apply for a traditional bank loan.
When we think of life insurance that covers us for the entire duration of our lives, it is called whole life insurance. In contrast, term life insurance lasts for a specific duration (e.g., 15, 20 or 30 years). Plus it does not provide a payout after it expires.
Both types of life insurance have their pros and cons. For example, term life insurance is cheaper. So decide which is more suitable for you.
What other types of insurance are recommended for business owners?
The four types of insurance mentioned above–disability insurance, health insurance, liability insurance, and life insurance–are generally recommended for all self-employed individuals. Apart from these, however, you may also need other types of insurance depending on your industry and business needs.
For example, if you are a private-hire driver, you will likely need a business auto policy to cover you for car accidents. Alternatively, if you are a photographer, you may want to take up equipment insurance in case your gear is stolen or damaged on set. Lastly, if you travel overseas for meetings and conferences, you may want to invest in travel insurance.
But of course, the more coverage you need, the more it’ll cost you. Therefore before purchasing insurance, consider your finances to ensure you get the level of coverage you need, and at prices, you can afford. If in doubt, get in touch with an insurance agent to discuss your needs further.
Siew Ann Tan is the founder of lancerX, a resource blog for freelancers looking to turn their craft into sustainable and meaningful full-time businesses. A strong believer in the future growth of the gig economy, Siew Ann is also an advocate for self-discovery and pursuing your passion. Subscribe to the lancerX monthly e-newsletter here.