6 Insurance and Risk Gaps Business Owners Often Miss Before Retirement
Sam's List Editorial | 2026-06-06
6 Insurance and Risk Gaps Business Owners Often Miss Before Retirement Most business owners spend more time planning their exit than protecting the value that makes the exit possible. The conversations about buyer candidates, deal structure, and valuation multiples tend to crowd out the insurance and risk conversations that should happen first. The result is a business owner who has built significant equity over 20 years and is entering the most financially consequential period of their life with insurance coverage that hasn't been updated since the business was half the size and a much simpler entity. These six risk gaps show up repeatedly in pre-retirement reviews for business owners. None of them are complicated to address. All of them are expensive to discover after the event they were supposed to protect against. 1. No Key-Person Life Insurance on the Founder If the business generates revenue primarily because of the founder's relationships, expertise, or client trust, that revenue isn't transferable without transition time. A lender who funded a $2 million SBA loan based on the owner's track record has a collateral concern the moment that owner dies. A strategic buyer who was valuing the business at a multiple of EBITDA assumes that EBITDA continues — and it may not, immediately, without the person who built it. Key-person life insurance protects against this. It pays the business a death benefit that can be used to retire the SBA loan, recruit and retain a successor, or bridge revenue while the transition occurs. The conversation worth having with your advisor is: if you died tomorrow, what would happen to the business's revenue over the following 12 months, and is there coverage in place to bridge that gap? 2. A Buy-Sell Agreement Not Updated Since the Business Doubled in Size A buy-sell agreement drafted when the business was worth $500,000 may use a fixed valuation formula, a fixed dollar amount, or a book value approach that produces a wildly different number now that the business is worth $3 million or more. The underfunding problem is the obvious one: if the life insurance funding the agreement covers a $500,000 buyout and the current buyout obligation is $3 million, the surviving co-owner or the business has to find $2.5 million from somewhere else. The less obvious problem is the tax issue: certain valuation arrangements set in a buy-sell agreement can be treated as the estate value of the decedent's interest for estate tax purposes — and a formula set 15 years ago may produce an outcome that wasn't intended under current valuations. Ask...
