How Much Does Insurance Cost for a Startup?

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Is insurance legally required for a startup?
Which factors will determine how much insurance will cost for my startup?
Can you give an example of how insurance costs could differ greatly?
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Is insurance legally required for a startup?

I’ve had this business idea for a long time and I’m finally ready to start my startup. I’m looking into costs and I can’t figure out whether I need insurance. Is it legally required?

Great question! When you start any business – start-up or not – there are laws that might require insurance. If you want the ins and outs of when you’re required to purchase business insurance, be sure to check out our other Q&As.

If you don’t want to read the full Q&A, here’s the gist: Sometimes the government legally requires you to purchase insurance (like workers' compensation) and sometimes the party you’re doing business with requires you to purchase insurance. If neither of these apply, it’s up to you whether you want to purchase it.

Which factors will determine how much insurance will cost for my startup?

OK - so regardless of whether insurance is legally required, I may want to buy it. And if I decide to buy it, what kinds of factors will go into how much it costs me?

This is a great question! I can simplify it down to two factors for the purposes of this Q&A:

  1. How much stuff can you lose?
  2. How many people can sue you?

After all, a general liability business policy will cover your property and lawsuits. If you’re in a business where you have to buy a lot of equipment and you deal with a lot of people, you’ll need more coverage and the premium will cost more. As always, a independent agent is the best resource you can use when you have questions regarding what insurance coverage you require.

Let’s illustrate this idea with some examples below.

Can you give an example of how insurance costs could differ greatly?

It makes sense that my coverage will depend on what I can lose and how many people can sue me, but I just want to make sure I completely understand what you mean. Could you give me some examples?

Examples are by far the best way to understand any finicky insurance concept. Let’s dive in with something that’ll really nail down what we’re talking about: starting a building demolition business vs. starting a birthday cake business.

If you start a building demolition business, you’re going to have a lot of expensive equipment and there will be a lot of potential people who can sue you. Just think about every possible thing that can go wrong and amplify that if you’re working in urban areas where pedestrians and other buildings are close to your projects.

On the flip side, think about starting a birthday cake business. You’re probably the only employee, or maybe you have one more. You probably work out of your home so you don’t really have any “equipment” or “stuff” to lose. And sure, your cake could cause someone to get sick if you do something wrong, but there aren’t that many people at risk. All these things considered, it’ll cost a lot less to cover that business than the building demolition business. 

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