Got a home-based business? Make sure it's properly insured
Do you earn cash walking dogs, giving marimba lessons or selling jewelry online? If you work out of your home -- whether it's a side gig or a full-time job -- it's important to make sure your business is properly insured.
But many business owners don't. In fact, 52 percent of the more than 28 million small businesses in the U.S. operate mostly out of a home, according to the Small Business Administration. And about 60 percent of those home businesses either don't have insurance or don't have enough, according to a newly released guide from the nonprofit consumer advocacy group Consumer Action.
"A lot of people just think their home insurance is going to cut it, but that's often not the case," says Linda Sherry, director of national priorities for Consumer Action.
How to properly insure your home-based business
So, what do you need to think about if you have a home-based business? Experts say there are three major categories to consider.
1. Your equipment.
Ask yourself: How much is your business property worth? A wedding photographer might tote around $5,000 worth of cameras and lenses, or a computer programmer might have $10,000 worth of computers sitting in a home office, says Troy Thompson, principal at Pinnacle Insurance Agency of Minnesota, which sells personal and commercial insurance. But most home insurance policies only cover damage to property up to about $2,500, according to the Rocky Mountain Insurance Information Association RMIIA).
If a client trips and falls on your property or someone gets hurt while using your product, you could face an insurance claim or lawsuit, experts say. And creating products, such as toys or food, can add to your risk. "People might not think about this, but if they sell a doll and a kid eats the eyes and chokes, they're liable," Sherry says. Most home insurance policies don't cover business liability, according to the RMIIA.
3. Risks specific to your business.
There are thousands of types of home-based businesses and each comes with risks, Thompson says. Just one example: Professional liability insurance protects a business owner who gives incorrect or misleading advice that leads to a loss, Thompson says. Financial planners, attorneys and cosmetologists are examples of professionals who might need this type of insurance, he adds.
Types of insurance for your home-based business
So, what kind of insurance do you need for your business? That depends on several factors that vary by insurer, Thompson says. For example: whether you do your business on the side or full time, how much money you earn, the type of business, and whether customers come to your home.
You should meet with an independent insurance broker or agent -- meaning one who sells insurance from a variety of insurers -- to assess your specific needs, Thompson says. But, in general, there are three main options.
1. Add your business to your home insurance policy.
For a very small business, you might be able to buy an add-on -- known as an endorsement or rider -- for your home insurance policy, Thompson says. It could cost less than $100 a year to add some business coverage to your home insurance policy, he says. Endorsements typically cover businesses that bring in less than $5,000 a year, according to the RMIIA.
2. Get an in-home business policy.
These policies were created specifically as a response to the growth in home-based businesses, according to the RMIIA. An in-home business policy can cost as little as $200 a year and will cover business equipment, general liability and lost income if you're temporarily unable to operate your business because of damage to your home, according to the RMIIA. With this type of policy, you can insure your business property for up to $10,000 and buy liability coverage between $300,000 and $1 million, according to the RMIIA.
3. Buy a business owners' package policy.
If your home business is full time, brings in a lot of revenue and you have clients visiting your home, your broker or agent might recommend you purchase a business owner's package policy BOP), Sherry says. According to the Consumer Action report, a larger business such as a cupcake bakery or tax refund processing enterprise might want to consider a BOP. A BOP can cover businesses with sales up to $3 million, according to the RMIIA. A BOP covers your equipment and liability, says Marc Cohen, a commercial insurance agent with Bearence Management Group, in Minnesota. The cost of a BOP will vary, but a business owner might pay $500 to $1,000 a year, Thompson says.
Insurance tips for home-based businesses
If you run a business out of your home, experts recommend you get advice from an independent insurance broker or agent who sells commercial insurance policies from a variety of insurers. Here are some additional tips.
- Tell your home insurer. Talk to your home insurance company as soon as you start your business, Thompson says. Otherwise, if you have a claim that resulted from your business activity -- say your business equipment caught on fire and burned down your home -- your insurer could refuse to cover it, he says. Or, the insurer might pay the claim and then drop you, he says.
- Be ready to get new home insurance if necessary. If you have a risky business, such as day care or acupuncture service, your home insurer might decide they don't want to continue to cover you, even if you have a separate business policy.
- Remember auto insurance. Tell your auto insurer if you use your vehicle for business purposes, Sherry recommends. Your personal auto policy might still cover you, but it depends on the insurer and the state, according to the Consumer Action report. Be forthcoming with all of your insurers and get any extra coverage you need, Thompson recommends: "You'll be covered -- and you'll be able sleep at night."
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