You’ve drawn up revenue projections. You’ve lined up office space. You’ve perhaps even scooped up some seed funding. Your startup is ready to roll, right? Not so fast. Have you given any thought to your startup’s insurance coverage?
Too many entrepreneurs focus heavily on the riches and rewards of launching a startup but fail to fully assess the risks. For cash-strapped startups, insurance may be viewed as a luxury. As a result, some startups lack the proper insurance coverage to protect against the built-in risks of owning and operating a business.
“Unfortunately, this doesn’t become known until a loss or an illness or an accident occurs, which can cause severe or irreversible harm to a business and its owners,” says Onofrio Cirianni, managing member of EisnerAmper Wealth Management & Corporate Benefits LLC.
To head off harm, experts offer these five tips:
Weighing the types of insurance you need
In some cases, certain types of coverage may be mandated by law. The sorts of coverage that you’ll likely want to put into the mix — or even may be required to buy — include:
- Auto (if a car is registered under the business’ name)
- General liability
- Professional liability (also known as errors and omissions)
- Workers’ compensation
- Directors and officers (if your startup has a board of directors)
Maureen Boeing, vice president of Landmark Insurance Agency and chair of insurance industry advocacy and education group ASCnet, says your startup shouldn’t overlook business interruption insurance, also known as business income insurance. This type of insurance — sold as an add-on to other policies — helps a business recover from a disaster, such as a fire.
“After an insurance claim, startup companies frequently do not have enough business income … to tide them over and allow them to restart operations,” Boeing says. “I’ve heard it said that the number one reason a company doesn’t reopen their doors after filing a claim is because they didn’t have adequate business income coverage.”
Picking the right insurance broker
Interview all of the brokers you’re considering, insurance consultant Dan Weedin says, and check their references. Referrals can come from trusted folks like your attorney or accountant.
“Don’t just meet with a ‘friend of a friend’ because he’s in the insurance business,” says Jeffrey Ingalls, president of insurance consultant and broker The Stratford Financial Group.
Experts say your best bet is an independent broker who represents several insurance companies.
All of the broker candidates should be familiar with your industry, says Jeremy Schaedler, president of Schaedler Insurance. “Getting quotes from insurance companies or agencies not familiar with the business in question is a recipe for disaster, regardless of how low the cost of any insurance is,” he says.
Buying the right coverage
Keep in mind that the best deal isn’t the cheapest deal, Weedin says. The best deal, he says, is one that fully protects your business at a fair price.
“Some policies may look similar in the dollar amounts of coverage provided, but may differ greatly when evaluating the fine print, including coverage exclusions. This can make an apples-to-apples comparison nearly impossible,” Schaedler says.
Setting aside enough money for insurance
Unfortunately, there’s no magic formula for figuring out how much insurance your startup needs — and how much you’ll spend on that coverage. The type and location of your business, the number of employees and the amount of capital invested will help dictate which policies you purchase.
“It is prudent to review all the necessary insurance in the business plan as early as possible and budget in advance,” Cirianni says.
Looking closely at health insurance
Experts say the high cost of health insurance makes it critical to scrutinize what type of coverage your startup should buy. For instance, is your startup staffed mostly by young, healthy workers? If so, you might want to pick a high-deductible, low-premium plan without a lot of bells and whistles.
“Too many employers overemphasize the need for dental and vision insurance for their employees. This is something that is not necessary, at least at the starting level,” says Pete Villemain, president of Employee Benefit Services, a benefits administrator.
Weedin estimates health insurance can eat up 5 percent to 10 percent of a startup’s budget, depending on factors like the number of employees.
Andy Hiles, Southeast regional leader for health and group benefits at HR consulting giant Towers Watson, says: “Employers sometimes rush to a ‘solution’ that has become prevalent practice in the market without a full analysis of their unique situation. Every workforce is different.”
Experts say your startup should check into three types of health care benefits to help trim costs for employer and employee alike:
- Health reimbursement arrangements (HRAs). An employer-funded HRA, available to workers at companies of any size, covers medical expenses. For example, if an employee racks up an eligible $500 medical expense, the full amount will be covered by the HRA if the money is there, according to the U.S. Bureau of Labor Statistics. All unused money is rolled over at the end of each year.
- Health savings accounts (HSAs). An HSA (think of it like personal savings account) allows employees covered by high-deductible health plans to squirrel away money for medical expenses. The Mayo Clinic says the employee — not the employer or insurer — owns and controls the HSA money. The money you deposit is not taxed; you can invest it in stocks, bonds and mutual funds.
- Flexible savings accounts (FSAs). An FSA lets you set aside money for eligible expenses. Money you put into your FSA is taken out of your paycheck before taxes are taken out, according to Aetna. You can use the account to cover eligible health care expenses, such as contact lenses and acupuncture treatment, or child care expenses.
Villemain suggests starting out conservatively with your health care benefits, as it’s hard to cut back later if your startup offers a blue-chip plan from the get-go. “You should not offer benefits if attracting and retaining key employees is not a necessity,” he says.
John Egan is managing editor of NetQuote.com, a website owned by Bankrate that allows people to shop for insurance and that provides information and advice about insurance. Follow him on Twitter at @JohnJEgan.