Valuations for business insurance.

The four insurance contexts where business valuation matters

Key-person insurance. The policy pays out to the business if a key individual (usually the owner-operator or critical executive) dies or becomes disabled. Proceeds fund replacement-hire costs, revenue stabilisation, and debt coverage during the transition. Size: typically 3–5 years of the key person’s contribution to profit, but can range higher for businesses highly dependent on the individual.

Buy-sell funding (life and disability cover on partners). The policy pays out to the surviving partners, giving them the capital to buy out the deceased or disabled partner’s share at the agreed trigger valuation. Size: the partner’s pro-rata share of business value, typically per the buy-sell agreement trigger.

Business interruption cover. Pays the business during periods of operational disruption (fire, flood, extended illness, pandemic). Size varies by policy type but typically references 12–18 months of gross profit or revenue. The valuation matters less here than for the other types but is still useful for board-level conversations.

Critical-illness cover for owners. A personal policy that pays the owner during extended illness so the business doesn’t have to. Size: typically 3–5 years of the owner’s drawings plus specific costs the business can’t cover during the illness.

Why most owners are under-insured

The pattern is nearly universal: an owner sets up key-person or buy-sell cover at business formation or at an early milestone, then never revisits it. Over 5–15 years:

• Business value grows by 3–10x on the original baseline
• The insurance stays flat at the original level
• Premium creep is treated as “fine” but coverage adequacy is never re-tested

When the trigger fires (death, disability, extended illness), the shortfall becomes obvious: cover is $500k against a $3M business. The surviving partners or the business can’t fund the buyout. Families receive a fraction of the partner’s fair share. Businesses can’t afford the replacement-hire and transition costs and often end up distressed or sold under pressure.

The fix is mechanical: refresh the valuation annually and review insurance coverage alongside. A Valuion Standard report at $199 is designed for this: it’s the cheapest way to ensure your insurance reflects current-year business value.

Working with your insurance broker

Most insurance brokers welcome a methodology-grounded valuation. It makes their job faster: they can size policies against a defensible number rather than asking you to estimate or relying on stale data. The workflow:

1. Run the Valuion Standard report annually. Takes 10 minutes.
2. Share the executive summary with your broker. They’ll propose policy changes (increase cover, adjust premium, restructure policy type).
3. Adjust cover as needed. Most policies allow coverage increases without a full new underwrite up to specific limits.
4. Document the review. Good governance: the annual “insurance review with current valuation” note in your business records.

This annual rhythm typically takes 30–60 minutes total per year and closes the biggest single gap in SME risk management.