Unsure How to Insure? The Difference Between Traditional, Self, and Captive Insurance

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Over 627,000 new businesses open each year, which means that hundreds of thousands of business owners are in need of insurance solutions.

Whether or not you’re new to the world of business, you’re likely familiar with the coverage offered by traditional insurance. However, did you know that you have other options?

Traditional insurance may make sense for big companies, but captive insurance and self insurance are viable options for companies of all sizes.

Read on to learn more about each to make an informed decision for your business.

The Trouble With Traditional Insurance

Traditional insurance entails that you pay monthly premiums to maintain your coverage. A lot of times, these premiums are excessively high to help make up for the insurance company’s loss every time a business files a claim. Plus, insurance companies may not offer the specific coverage your business needs and instead offer a limited, generic package.

In an ideal world, nothing catastrophic will happen to your business that would require you to use your coverage. In fact, this is the case for a lot of business owners. When this happens, you’re paying money to a company that never gives you anything in return.

The Self Insurance Option

The self insurance option takes the third party out of the equation. Rather than paying money to an insurance company as a form of risk mitigation, you simply set aside a substantial chunk of your own revenue. This money is then available to you in the event of a major loss.

The upside to self insurance is that your business will save operating costs that would have gone to insurance premiums. In addition, the money you’ve set aside is still available in the event that you never do experience a loss, unlike premiums.

The downside is that you may not acquire enough money to cover any losses you may face. You may be taking the risk of having to take out costly loans down the road.

Captive Insurance: The Best Solution

The final and best solution is captive insurance. Captive insurance shares all of the same pros as self insurance with more structure and the potential for lowered risk.

Captive insurance allows you to use your own pretax premium payments to build a customized insurance company of your own. You can structure this risk mitigation tool to cover the most unique and specific risks your particular business takes on. 

In addition, you can also share the risk by partnering with other business owners who buy into your captive insurance company. Plus, captive insurance offers the benefit of a reinsurance option. This allows you to add an additional layer of risk mitigation by reinsuring losses up to a limited amount.

Pick Your Insurance Wisely

As a new business owner, you aren’t only deciding how to mitigate risk and what to insure. You also have to determine whether traditional, self, or captive insurance is the best for you. Captive insurance offers the most benefits for business owners of all sizes and is the business insurance choice of the future.

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