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For a small business owner trying to navigate the insurance landscape, selecting an insurance policy that provides the appropriate level of coverage at an affordable insurance premium is the bottom-line goal.
But what exactly is an insurance premium, and how is it calculated for your policy? Simply put, your insurance premium is the cost you pay for insurance coverage, and it is determined by the risks involved in operating your business. Follow along for a closer look at insurance premiums.
What is an insurance premium?
Basically, your insurance premium is the amount you must pay the insurance company for your insurance coverage. It’s the price agreed upon when you, the insured, accept the quote with your insurance company. This is true for all types of insurance, from auto to health. It is also true for the major types of insurance you need to protect your business, including:
- General liability insurance
- Professional liability insurance
- Event insurance
- Business equipment protection
Essentially, if insurance policies came packaged in a box you could pick up off a store shelf, the insurance premium would be the amount featured on the price tag. Further on, we’ll delve a little deeper into some of the most common factors that affect your premium.
How are insurance premiums paid?
For a lot of insurance companies, you can choose to pay a one-time annual amount for your insurance coverage, or you can pay in monthly installments. If you elect to pay your annual premium on a monthly payment plan basis, a small service fee will be added to each installment.
You typically make payments via debit credit card (or, if the insurance company is really old-school, by check). Some companies will allow you to set up automatic payments. In many cases, with annual insurance, you’re expected to pay the first and last month’s premium upfront. It’s like the deposit and first month’s rent you’re often required to pay when leasing a new apartment.
At Thimble, we try to offer more choices, so you have the flexibility to choose the type of payment plan that best suits your company’s needs. When you buy insurance with us, you can pay your premiums in one of three different ways:
- Insurance by the job
- Insurance by the month
- Annual Insurance
If you’re trying to choose between these three options, consider the duration of the work you typically do. If customers often hire you for a one-off project followed by a period of inactivity, then one of the first two options might be the right fit. But if you’ve entered into long-term contracts with your clients or you’re leasing commercial space, the continual coverage that comes with annual insurance may make more sense.
Keep in mind that if you miss a monthly insurance premium payment, some insurance companies will make you pay late fees. But more importantly, if your payment is received too late, this can result in policy cancellation, meaning that you will no longer be covered. You definitely don’t want to find yourself in a position of not having coverage.
And if you have a track record of not paying your insurance premiums on time, it might affect your ability to get future policies and how you pay for them. Some insurers may require you to pay the total premium upfront (ouch!), instead of paying smaller amounts monthly.
How is insurance premium determined?
Generally, premiums are based on your industry, location, crew size, total employee salary, years in business, claims history, policy term, and the coverage amount. The larger the crew size, the longer the policy term, and the higher the coverage limits, the greater the premium. There are many other factors involved in determining an insurance premium, and there isn’t a universal formula in the industry. As such, each insurance company will calculate the premium using its own formula, although regulators must review and approve most insurance rates and forms. Here are the common variables.
The type of insurance you need
Each small business offers a distinct product or service and, therefore, incurs different types of risks. That means one type of insurance policy might be right for one small business but isn’t necessary for another.
If your business has employees, you will likely need to purchase a workers’ compensation policy. Not only is it a good idea, but almost all states require it. If your business owns an assortment of tools you use for work, it might be a good idea to purchase business equipment protection (BEP) to safeguard your investment. Even if you don’t have employees or tools, you’ll need some liability coverage — perhaps general liability insurance, professional liability insurance, or both.
Property, Workers comp and liability policy premiums are calculated using different exposures (i.e., the value of property or equipment vs. the number of employees or liability limits), but most have a minimum premium requirement.
Your policy limit
Suppose you’re insuring your business with a $1 million policy limit (meaning, the total amount of your coverage). In that case, you will naturally pay less than someone buying a policy with a $2 million limit. Of course, this presumes all other premium factors are equal. Other factors will be considered as well, such as the deductible you’ve selected and your claims history. Typically, the higher your policy limit, the higher your insurance premium will be. As with most things, with insurance, you get what you pay for.
Whether you’re insuring yourself as a driver (think: car accidents) or your small business (think: lawsuits), your history plays a big role in calculating the cost of your insurance premium. For instance, if you are looking for a commercial auto insurance policy, and your construction business has totaled four trucks in the last three years, your loss history will impact your future insurance expense.
The same goes for any other line of business insurance. If you’ve been sued or had prior claims filed against you, your business will be considered higher risk than another business with a “clean” record.
The risk inherent to the policy
Another aspect is the risk involved in what you do. A small business insurance policy for a local bookstore is likely to be a lot less expensive than one for a roofing company. Why? Because of the risks of property damage or bodily injury involved with roofing. This applies across every insurance type and is specific to the industry, profession, and individual.
For instance, a business that has had many workplace accidents in the past year is going to have a higher insurance premium than a business that has maintained a clean slate. Statistically, a business that has had prior losses is more likely to have repeat claims.
Your location also usually plays a part in the way an insurance premium is determined. If you’re in a “high-risk” area, then you might have to pay more for coverage. But what does a high-risk area mean? Let’s say you just opened a business in Florida, and now you’d like to purchase a business owners policy (BOP). According to the National Weather Service, Florida has been hit with more hurricanes than any other state in more than 150 years.1 That could be a huge factor in determining the price of your premium.
Lastly, your deductible is the amount that you pay “out-of-pocket” when a claim is paid. The insurance company will deduct the deductible from the claimed amount and pay the remaining difference. This means when the insurance company cuts you a check, the payout will be reduced by the deductible you selected when you bound coverage.
Generally, If you have a higher deductible, you will likely pay less for your insurance premium because you’re sharing more of the risk with the insurance company. On the other hand, you will likely pay more in insurance premiums if you have a lower deductible.
What determines my annual premium?
Annual premiums cannot change during your policy period, but you may see fluctuations when it comes time to renew your policy. Many factors can affect your renewal premiums, including:
- Changes in your business model, such as expansion or new products
- Changes in your limits, which can be impacted by things like a new storefront or renovations to your existing manufacturing space
- Increasing or decreasing your deductible
- Your claims history (for example, if you had no claims for the past year, you may receive a rate decrease)
- Changes to the number of employees
Keep in mind that if you had a paid claim during your expiring policy term, there is a good chance your premium will go up. If you have general liability insurance and your business causes damages to multiple third parties over an extended period of time as a result of poor safety practices, your insurance carrier will likely raise your premium.
Or, if a market experiences unexpected activity (disasters, real estate appreciation, a widespread sickness or disease) then it can affect premiums for all insureds in that market. Thus, the price you pay can also depend on factors beyond your individual policy experience.
Thimble: insurance premiums tailored to your business
We’ve taken a pretty deep dive on the topic of insurance premiums to help you understand the ins and outs of making sure your business has the right kind of insurance to protect you should an accident occur.
At Thimble, we try to keep things simple. And we do things a little differently. With our flexible small business insurance policies, you can choose from a policy by the job, month, or year. With us, you don’t have to pay premiums for insurance when you don’t need it.
Don’t believe the hype? Click “Get a quote” or download the Thimble mobile app, answer a quick set of questions, receive your quote, and click to purchase — all within minutes.
Get a quote. Believe the hype.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.