Every entrepreneur wears a lot of hats—but what happens to the business if the person wearing most of them suddenly isn’t there?
That’s the uncomfortable, but critical question key person insurance is designed to answer. Whether you're a founder, CEO, or high-impact leader, your business likely depends on you in significant ways. And if you're planning to exit your company down the road, not having key person insurance in place could quietly kill your valuation—or the deal entirely.
So, what is key person insurance, and why should you be thinking about it sooner rather than later?
What Is Key Person Insurance?
Key person insurance (also known as key man insurance) is a life or disability insurance policy a business takes out on an essential employee—usually a founder, top executive, or someone with specialized skills or deep client relationships. The business is the policy’s beneficiary, meaning it receives the payout if the key person dies or becomes disabled.
Why It’s A Must-Have For Entrepreneurs
You’re Likely The Most Valuable Asset
If you’re the visionary, the rainmaker, or the ops genius who holds everything together, your absence could halt momentum, delay product development, or scare away customers and investors. Key person insurance helps buy time and stabilize operations during the transition.
Replacement Costs Add Up Fast
Replacing a founder or core team member isn’t just about hiring someone new. There’s recruitment, onboarding, lost productivity, possibly lost clients, and a culture shift to manage. A strong policy ensures your business has the financial runway to conduct a proper search and onboard someone who’s not just a warm body—but a strategic fit.
Buyers (And Investors) Look For It
If selling your business is even remotely in your future, a potential buyer will want to know: “What happens if this person is gone tomorrow?” A lack of key person coverage can be a red flag. It signals that the business might not survive without you—and that’s not the kind of risk most acquirers want to take.
A properly structured policy tells a buyer:
“We’ve thought ahead. We’ve built resilience. This business isn’t just about one person.”
What Should Your Policy Cover?
Not all key person policies are created equal. Here are a few things to consider when evaluating options:
Runway Duration: Does the payout give your business 6–12 months (or more) to find and train a replacement?
Scope Of Coverage: Are you covering just death, or also long-term disability?
Tax Implications: Depending on the structure, benefits may be taxable. Consult a financial advisor to optimize how the policy is set up.
Policy Ownership: The business should own the policy and be the beneficiary—not the individual.
Bonus Benefit: Peace Of Mind For Everyone
Beyond dollars and cents, key person insurance gives your team, your clients, and your family confidence that the business won’t crumble in a worst-case scenario. That kind of stability builds trust—and it's invaluable.
Conclusion
Whether you’re aiming for a strategic exit, a private equity deal, or just long-term sustainability, your company should be able to keep moving without you at the helm.
That’s not only good leadership—it’s good business.
If you’re thinking about how to future-proof your company for a sale, protect your legacy, and maximize value at the exit, take a look at Exit Stage Left Advisors. They specialize in guiding entrepreneurs through smart, smooth exits—and they’ll help make sure the lights stay on, even if you’re no longer in the room.
