How to Start an Insurance Company – Overview
Forming an insurance company is not easy, but you can still realize this dream with a mix of equity and the right focus. Many successful insurance agents think of opening their own insurance companies, while some entrepreneurs are fascinated by the lucrative insurance industry.
Apart from this, some professionals may want to open an insurance company owing to the incredible profits and stability of the insurance industry.
Regardless of the reason for starting a new insurance company, it is inarguably a great investment opportunity. However, starting an insurance company and managing its daily operations is only for some, as you first need to become a licensed insurance agent.
7 Steps to Start an Insurance Company
As the potential for profit far outweighs the risks involved in the insurance industry, we have listed the steps to start an insurance company in the US.
Step 1: Create a Business Plan
A feasible insurance company business plan is necessary to ensure the business’s success and proper operation. This plan details the commitment to potential stakeholders, including employees, insurance carriers, and investors.
In short, a practical business plan for an insurance company is helpful to:
- Set realistic goals
- Avoid potential obstacles
- Determine risk factors
- Identify financial requirements and resources
A business plan should be such that it can be amended and improved at any time. Ideally, the business plan offers guidance for operating an insurance company after its establishment.
Some of the essential elements of a sound insurance agency business plan include:
- Introduction of who is involved in the business and who is responsible for executing the business plan.
- Explanation of the plan to get customers, including details of insurance products and services provided by your company.
- Identifying the target market, suppliers, and competitors.
- Describing the distinct points that set your business apart from competitors.
- Analyzing risks regularly.
- Including an initial budget to cover the start-up cost and cash flow projection.
Think of a business plan as the foundation of a new business. A practically sound business plan will help you secure financing and start-up capital, identify your market and choose the best-suited location for your insurance business.
Step 2: Choose the Legal Structure
The amount of personal liability you take on will depend on the structure of your insurance business, as there are several different types of structures, namely:
- Sole proprietorship
- Limited liability company (LLC)
- S Corporation
Every legal structure listed above has its benefits and risks.
For instance, a sole proprietorship is the simplest legal structure for any business, including insurance companies. However, sole proprietorship also incurs greater personal liability. In short, you may have to use your assets to settle unpaid business debts under this legal structure. If you face a lawsuit, your assets are also at risk with this business structure.
In contrast, LLCs and corporations mark a legal distinction between you and your business/company. Though LLCs and corporations are more elaborate and costly to establish, they protect your assets in most situations.
Remember, regardless of the legal structure you choose for your insurance business, choose the right business insurance policy to minimize and mitigate risks.
Step 3: Choose and Register your Company’s Name
Once you have successfully developed a business plan and selected the legal structure for your insurance company, it is time to decide and register a name for your enterprise.
If you are the sole proprietor of the company, then the legal name of your business is your name. However, you can also choose a DBA (doing business as) name, which allows you to use your creativity.
Here are some pointers to help you choose the most influential name for your insurance company:
- It is easy to spell
- Fulfills your state’s legal requirements
- Conveys the insurance agency’s benefits
- It is easy to search
However, you need to be aware that most states prohibit using specific words to prevent a business name from being deceptive or misleading to the public. You can check with your Secretary of State’s office to find out the specific restrictions of your state regarding naming an insurance company.
Once you have decided on the name, you must register it with the state government, for which you will likely have to pay a small registration fee.
Step 4: Get a Tax ID Number
The Internal Revenue Service (IRS) dictates all corporations and partnerships use a FEIN (Federal Employee Identification Number) for tax purposes. In addition, you will also need this Tax ID number to open a business bank account or get a credit card issued to your business. In contrast, if you are the sole proprietor of the insurance company, then you can use your Social Security number for this purpose.
Step 5: Register your Business with the State
Once you receive the Tax ID number, contact your state insurance commissioner’s office. For state and local tax purposes, you must usually register as a “resident business entity.” In addition, your state will also charge you a registration fee and provide a checklist of all compliance and regulations for your use.
Step 6: Get Your Business Licenses and Permits
Despite being a licensed insurance agent, you may still need a general business permit/license to operate the business legally. You can use the SBA’s Business Licenses and Permit Tool to find your required permits and licenses.
You should also check with the local and state regulatory agencies to ensure your business complies with legal, labor and tax rules.
Step 7: Buy Insurance for Your Insurance Company
Yes, even insurance companies need business insurance like any other business entity. The type of business insurance you will require mainly depends on the type of legal structure of the business and its assets. You should consider various other risks when operating your company as a business owner.
General liability insurance is commonly recommended for insurance companies as it protects you from liability for any damage or injury to a customer or customer’s property. Errors and omissions (E&O) insurance, or professional liability insurance, helps protect businesses from lawsuits related to alleged errors or oversights. Some states even require that a business has an E&O insurance policy when registering the business.
Starting your own insurance company can be daunting, but with hard work, the proper focus and your business acumen, you can effectively turn your dream into reality. If you have already launched your insurance company or are ready to start one, then make sure to check every step given in this article to ensure a smooth and compliant insurance business.