Kent Patrick: Key man insurance offers risk management to preserve value 

Published 5:25 pm Thursday, April 3, 2025

As a business owner or investor, protecting your company from unforeseen risks is essential to ensuring long-term success. 

One of the most significant risks businesses face is the sudden loss of a key individual – someone whose expertise, leadership or relationships are integral to the company’s operations and profitability. This is where “Key Man” insurance comes into play. Also known as key person insurance, this coverage provides financial protection in the event that a crucial employee, owner or executive becomes disabled or dying unexpectedly.

For clients and investors, key man insurance is not only a safeguard for the business, but also a strategic tool for maintaining stability, preserving value and ensuring business continuity. Here’s a look at how key man insurance works and why it’s an essential consideration for business owners and stakeholders alike.

What Is key man insurance?

Key man insurance is a life or disability insurance policy that a company takes out on its most important employees — typically founders, executives or individuals with specialized skills or knowledge critical to the company’s success. The business is both the policyholder and the beneficiary. 

In the event of the key person’s death or disability, the company receives a lump-sum payout, which can be used to offset the financial impact caused by the loss.

The purpose of key man insurance is to protect the company from the potentially devastating effects of losing someone whose contributions are vital to its operations. The policy can help the business survive the immediate aftermath of a key person’s departure, providing the necessary funds to manage transitions, recruit a replacement or cover any financial losses that result from the key person’s absence.

Benefits of key man insurance 

Key man insurance offers several critical benefits that make it a worthwhile investment for both business owners and the investors who support them.

Business continuity and stability: When a key person is lost unexpectedly, the impact on the business can be significant. Whether it’s the founder with irreplaceable industry knowledge, the top salesperson driving revenue, or the CEO whose leadership steers the company’s vision, their absence can disrupt operations and lead to a loss of confidence from customers, investors, and employees.

Key man insurance provides a financial cushion that helps the business maintain continuity. The payout can be used to:

• Hire an interim or permanent replacement
• Cover any loss of revenue resulting from the key person’s absence
• Pay off business loans or outstanding debts
• Fund a business restructuring if necessary

This protection is vital to keeping the business stable and allowing it time to adjust and recover without being forced into sudden, reactive decisions.


Protection for investors: For investors, key man insurance helps safeguard the value of their investment in the business. The loss of a key executive or critical employee can lead to reduced profitability, increased costs and potential reputational damage — factors that can undermine the company’s valuation and erode investor confidence. The policy acts as a financial backstop, ensuring that the company has the resources needed to navigate the transition period without losing significant ground.

In private equity and venture capital-backed companies, key man insurance is often a requirement. Investors may insist that founders or key executives be insured to protect the company’s financial health and their own investments. By reducing the risk associated with the sudden loss of an essential leader, key man insurance provides greater security and peace of mind for all stakeholders.


Enhanced borrowing and financial flexibility: Key man insurance also can play a vital role in securing financing for the business. Lenders and financial institutions often view key man insurance as a way to mitigate risk, particularly when extending loans to small businesses or startups that are heavily reliant on a few individuals.

By having key man insurance in place, businesses can demonstrate to lenders that they have a contingency plan to protect their operations in the event of a key person’s loss. This assurance can make it easier to obtain loans, secure more favorable lending terms or negotiate better deals with creditors. For businesses looking to expand or invest in new opportunities, key man insurance can be an important factor in improving financial flexibility.


Protection for business partnerships: In companies with multiple owners or partners, key man insurance can also play a critical role in protecting the partnership and ensuring a smooth transition if one partner dies or becomes incapacitated. Without the proper planning, the surviving partners could face financial strain, especially if the deceased partner’s heirs or family members inherit the ownership stake.

Key man insurance provides the surviving partners with the financial means to buy out the deceased partner’s share of the business, allowing for a smooth ownership transition without jeopardizing the company’s future. This ensures that the business remains intact and that the interests of all parties are protected.


Safeguarding succession planning: For family-owned businesses or businesses with long-term succession plans in place, key man insurance helps ensure that the vision and strategy for the company can continue without disruption. If the heir or future leader of the business were to pass away or become disabled, the policy provides the financial resources needed to reestablish leadership and continue the planned transition.

Having key man insurance as part of the company’s succession plan provides security for future generations of leadership and helps to preserve the company’s legacy.

Is it right for your business?

If you’re a business owner or investor, understanding when and why key man insurance is needed can be crucial to protecting your company. 

Consider key man insurance if your business has:

• A reliance on a few key individuals whose expertise, leadership or industry knowledge is critical to success
• Significant financial obligations such as loans, lines of credit or investor commitments that would be difficult to meet without the key person
• A need for continuity planning, especially in the context of partnerships, ownership transition or succession planning.
• Investors or lenders who require additional assurances about the stability and risk management of the business

While no one wants to consider the possibility of losing a vital team member, key man insurance offers a practical solution for managing the unexpected and ensuring that the business can continue to thrive despite difficult circumstances.

An essential risk management tool

In today’s competitive business environment, companies can’t afford to overlook the impact of losing a key individual. Key man insurance provides a level of financial security that allows businesses to weather the storm, maintain stability and ensure a smooth transition in times of crisis. For investors, it offers peace of mind, knowing that their investment is protected from the risk of leadership disruption.

As financial professionals, we recommend that business owners and investors view key man insurance as an essential part of their overall risk management strategy. By safeguarding the business against the loss of its most important people, key man insurance helps preserve the value of the business, protect stakeholders and ensure long-term success.

This information should not be construed by any client or prospective client as the rendering of personalized investment advice.  For more information, please visit BushWealth.com for our full disclosures.

Kent Patrick is with Bush Wealth Management.