Is insurance a fixed or variable cost?
Insurance is generally considered a fixed cost because premiums remain consistent over the policy term, regardless of how much a business produces or sells. These costs are part of overhead expenses, helping protect the business from risk while staying relatively stable month to month.
What is insurance in accounting?
Insurance expenses refer to the premiums a business pays to cover risks such as property damage, liability, health, or workers’ compensation. Since most insurance policies require regular payments that don’t fluctuate with production or sales volume, they are classified as fixed operating costs. However, certain performance-based or usage-based insurance plans may behave like variable costs in specific industries.
How to categorize insurance costs
- Record as Operating Expenses in your income statement.
- Use an “Insurance Expense” or “Business Insurance” account in your chart of accounts.
- Classify as Fixed Costs because premiums typically stay constant during the coverage period.
- Allocate portions to departments or locations if multiple policies apply.
- For prepaid insurance, record it as an asset and expense it over the policy term.
- Reassess policies annually to track changes in premiums or coverage.
Examples of insurance costs
- General liability insurance.
- Property or equipment insurance.
- Health and dental insurance premiums for employees.
- Workers’ compensation insurance.
- Vehicle or commercial fleet insurance.
- Business interruption or income protection insurance.
- Professional liability (E&O) insurance.
Tax implications for insurance costs
- Business insurance premiums are fully tax-deductible as ordinary and necessary business expenses.
- Health and life insurance for employees are deductible as part of compensation costs.
- Insurance for personal use is not deductible.
- If a portion of insurance relates to capital assets (e.g., construction or equipment coverage), that portion may be capitalized instead of expensed.
- Maintain invoices, policies, and proof of payment for accurate tax and audit documentation.
