Just as you grow and change throughout your life, your exposure to risk does too. Personal insurance is meant to protect against different risks than business insurance, despite some similarities.
Knowing the differences between the two can ensure you have adequate coverage to protect your assets, limit your liability, and keep your finances on track if the unexpected happens.
Here we’ll cover how personal insurance and business insurance work, common coverages included with each, and where policyholders make costly assumptions.
Personal vs Business Insurance
Types of Personal Insurance
Personal insurance policies cover exposures related to loss of personal property, personal liability, and protection of personal income or family members. They do not insure against losses related to revenue or business operations.
Here are some common examples of personal insurance policies:
Homeowners insurance can cover your dwelling, personal property, liability for injuries incurred by others, and even loss of living expenses if you cannot occupy your home after a covered loss. Renters insurance is similar but does not cover the building itself.
Auto insurance covers your car for liability in the event you injure others in an accident, as well as damage to your vehicle itself. Collision, theft, and weather damage may also be included.
Life insurance provides pay-outs to beneficiaries when the insured passes away, while health insurance helps offset the costs of receiving medical care.
Umbrella policies are typically meant to supplement higher limits of liability coverage once the limits of a personal homeowners or auto policy have been reached. They’re common for higher net-worth households.
Features of Personal Insurance
Personal lines policies are built around natural persons and the risks they face based on ownership. Replacement cost of property, driving records, and household income are common bases for coverage limits. Personal policies may offer some flexibility in selecting deductibles, buying optional endorsements, and increasing limits when necessary.
Policyholders do run into restrictions, however. Many personal lines policies exclude business activity on the premises, professional services rendered, and certain high-risk applications of property or vehicles (i.e. racing).
Types of Business Insurance
Business insurance is meant to protect a legal entity, rather than a person. Business policies cover exposures related to generating revenue, having employees, being contractually obligated to others, and interacting with customers.
Business insurance policies include, but are not limited to:
General liability insurance is meant to cover third party bodily injury, property damage, and legal costs if you’re sued as a result of their damages.
Commercial property insurance can cover the physical building you operate from, as well as any contents, inventory, equipment, and furnishings that are used for business purposes.
Business interruption insurance can replace income lost and pay for ongoing expenses when you can’t operate due to a covered loss.
Professional liability insurance, also known as E&O, covers your business when clients or customers make claims related to errors, omissions, negligence, or misrepresentation of your work or advice.
Cyber liability insurance is becoming increasingly common. This coverage can cover data breaches, ransomware payments, and privacy law violations.
Workers’ compensation insurance is required in most states once you hire your first employee. Covers employees when they are injured on the job.
Features of Business Insurance
Business insurance policies tend to be highly modular. Limits, deductibles, and endorsements can apply to different parts of the policy depending on your industry, payroll, revenue, and contract requirements. Coverage limits are typically higher than you’d find on personal lines policies.
Some business insurance policies are subject to contract audit. If you renew workers’ compensation and general liability year after year without any changes to your business, you may see your premium go up because your payroll has increased.
Differences between Personal and Business
Cost and Coverage
The biggest difference between personal and business insurance is what and who is insured.
Personal insurance policies cover individuals, families, and household risks. Business insurance policies cover companies, partnerships, LLCs, sole proprietors, and business entities.
Personal insurance protects ownership, while business protects operations. If a visitor slips and falls on your property, your personal homeowners policy will likely cover their injuries. If they’re there to see your work studio or you supply products or services, your personal policy may deny coverage due to business activity.
Personal lines policies carry lower default limits as well. Business insurance policies are typically written with both per-occurrence limits and aggregate limits.
Premises
Commercial property requires commercial policies. Many landlords will require you to buy business insurance before leasing their commercial space.
When renting your home, a landlord may require business insurance if you’re renting the space to run a business. It is always recommended that you purchase business insurance to cover your business-related liability even if your landlord does not require it.
Cost
Personal lines premiums are based on where you live, how much your home is worth, how much you drive, and your claims history. Business insurance premiums are based on industry classification, payroll, revenue, number of employees, and claims history.
Business owners can typically deduct their premiums as an operating expense. Personal insurance premiums are not usually tax deductible.
As you can see, purchasing commercial insurance can actually save you money on taxes. This can make the cost of coverage materially different than personal insurance.
Higher limits, lower deductibles, and broader endorsements will increase premiums in both personal and commercial lines. While getting underinsured on your personal homeowners policy is a problem, getting underinsured on your business policy can cost you contracts and lost income if there’s a major outage.
Misconceptions
Many people think they can use their personal insurance to cover their business. This is not the case. Business use exclusions are included in most personal policies and can invalidate your entire claim if you’re working from home, freelancing, or running a side business.
Another common misconception is that more expensive insurance is always better. While it’s true that you get what you pay for, policy language, proper exclusions, sublimits, and valuation can matter more than price.
Selecting Coverage
How do you know what you need? It all starts with identifying your exposures.
Personal exposures include but are not limited to home replacement cost, how you use your vehicle, what assets you own, and how much money your family would need to support you if you passed away.
Business exposures include revenue, payroll, inventory you own, contracts with other businesses, and how long you could go without income if there was a major loss.
If you’re self-employed or own your own business, pay attention. Many small business owners think their personal policy is enough, but the moment you take on a client or customer, you open yourself up to liability exposures that far exceed the limits of most personal policies.
You may be able to add a home business endorsement to your existing homeowners policy. These policies help in some cases, but many home-based businesses require a full commercial policy.
Review your insurance policies regularly, and whenever you experience life changes. Adding a vehicle, quitting smoking, hiring employees, or taking on more contracts can void the terms of your existing policy.
Conclusion
Personal and business insurance aren’t the same, and they shouldn’t be used interchangeably. Personal insurance exists to protect you, your family, and your personal finances. Business insurance exists to protect your operations, your employees, and your bottom line.
Keeping these policies separate, properly structured, and routinely evaluated can help you avoid denied claims, uncovered losses, and unnecessary financial burdens. Just like your life and income change as you grow, your insurance should too.
FAQ
Q1: What is the main difference between personal and business insurance?
A: Personal insurance covers individuals/families, while business insurance covers companies.
Q2: Can I use personal insurance for a home based business?
A: In most cases, no. Personal policies exclude business related claims. Some limited coverage may be available through endorsements, but many home-based businesses require commercial insurance.
Q3: Why are business insurance limits usually higher?
A: Companies have much higher liability exposure when having employees, contracts, and risk losing income.
Q4: Do I need both personal and business insurance if I am self-employed?
A: Yes. Personal insurance covers your home/vehicle, while business covers you professionally, commercially, and for any clients or customers you interact with.