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Your Complete Guide to Life Insurance For SBA Loans

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Need life insurance to meet SBA loan requirements?

Not a problem!

If you’re on a tight deadline and need a policy fast, we can get you covered in 24-48 hours.

We’ll help you get insured, make sure the loan guidelines are satisfied, and help you with your collateral assignment, even if you have already been turned down by another insurance company.

If you have a pending loan through the SBA, we can get you covered, no matter what.

Let’s get started.

Is Life Insurance Required for SBA Loans?

When you apply for a small business loan, you may be required by the Office of Capital Access within the Small Business Administration to have life insurance.

To be specific, here’s what the SBA Loan Closing Document for 7(a) loans has to say:

Life insurance and/or disability insurance is not required for all loans, but the Lender should require life or disability insurance where there is a concern over whether the business could survive in the absence of an individual or small group of individuals that provide the management for the small business concern.

While life insurance may not be required for all loans, a vast majority of lenders will uphold the requirement, especially for a single-owner business, not dependent on the company’s tax filing status.

In other words, entrepreneurs who are the main revenue-driving forces behind the business will be required to have life insurance in order to be granted approval for funds from the SBA.

What Requirements Does the Life Insurance Policy Need to Meet?

There are four key requirements for a life insurance policy to satisfy the loan requirements and guidelines:

  • Active policy: The life insurance policy must be in force with the primary revenue creator or owner (often the same) before the loan can be issued.
  • Amount: The death benefit must cover the existing amount of outstanding principal on the loan applied for, and continue to do so in all loan years.
  • Duration of coverage: The life insurance policy length must match or exceed the duration of the loan’s repayment term.
  • Collateral assignment: A proper collateral assignment must be documented prior to approval.

If any of these requirements are not satisfied, even if you’ve applied for a policy and are waiting for approval, your loan application can and likely will be denied.

Need life insurance right now? If you’re looking to get a policy in place ASAP, we recommend Bestow. While several companies claim to give you an instant decision, Bestow comes through. With a streamlined online application and a same-day decision, you could have the life insurance you need to secure a loan today. Apply now.

How to Use Life Insurance for an SBA Loan

Purchasing life insurance and using it to obtain a small business loan doesn’t have to be complicated.

You can walk through the process, step-by-step, below.

Step 1: Gather Information

The number one issue borrowers encounter is running out of time.

On average, industry-wide, a fully underwritten life insurance policy takes 4-6 weeks from the time you apply to the time the policy is in force and can sometimes take longer.

As soon as you determine that you need a small business loan, you should start shopping for life insurance.

Begin by getting a life insurance quote for the amount of your loan, and make sure that the coverage lasts at least as long as the loan’s repayment term.

For example, if you are requesting an SBA loan of $250,000 and have agreed to pay it back in ten years, you need to shop for a 10-year $250,000 term policy.

Step 2: Choose a Life Insurance Company

One of the main driving factors in choosing a life insurance carrier is cost.

When you compare quotes for a policy that matches your loan amount, you may simply choose to opt for the policy with the lowest rates.

However, if time is a concern and you aren’t keen on waiting a minimum of 4-6 weeks to secure funding for your business endeavors, you may need to look beyond premiums to make your decision.

If you are on a deadline, we have policies like the one from Bestow mentioned above that can be in force in as little as 24 hours. Just note that these policies will cost more per thousand.

If you have a couple of weeks to spare, you can utilize a no exam life insurance policy. which allows you to bypass the medical exam and get approved within a few days or weeks.

With simplified underwriting, you split the difference between the cost of a fully underwritten term policy (least expensive) and a 24-hour or less approval process (most expensive).

Step 3: Apply for Coverage

As mentioned above, a traditional fully underwritten life insurance policy could take 4 to 6 weeks.

The application process encompasses the following steps:

  1. Application: A standard application consists of contact information, beneficiary information, medical questions and terms of the policy you’re looking to get.
  2. Medical exam: Once your application is completed, you’ll schedule an appointment with a third party exam company to complete the physical.
  3. Release of records: At the same time, you’ll grant the life insurance company access to your MVR (motor vehicle record), medical records, criminal records, driving records, and prescription database information.
  4. Underwriting: With the information above collected, the application and its corresponding documents reach an underwriter. If enough information is available, the underwriter will assess your risk and either approve or decline your application.
  5. Approval: If more information is required, an APS (attending physician statement) can be ordered for direct access to your medical files. Upon approval, you’ll be asked to sign an agreement, consenting to the terms of the policy and the premiums.
  6. Payment: When you sign off on the policy, you’ll be required to pay your first premium. Once payments are up to date and the delivery is complete, your policy is now considered in force, or active.

Step 3: Arrange a Collateral Assignment

life insurance for an sba loanThe life insurance used to obtain an SBA loan must be collaterally assigned, through an agreement between both parties regarding the distribution of the policy’s death benefit.

This agreement ensures the debt will be repaid no matter what.

With a collateral assignment, your outstanding principal with the SBA becomes the highest priority, with any remainder of the death benefit to be distributed at your discretion.

While collateral assignment usually requires a simple document, understand that not every life insurance company authorizes this type of arrangement.

The document must be notarized and recorded with the life insurance company’s legal department, which could take up to two weeks.

Once again, the entire process from start to finish will take an average of 4 to 6 weeks, assuming there aren’t extra hurdles to jump.

These hurdles might include additional steps of financial verification, more than one request for medical records, or other standard approval requirements.

Frequently Asked Questions About SBA Loan Life Insurance Policies

Still have questions?

The guidelines above should help you to secure life insurance and an SBA loan with ease, but here are a few more frequently asked questions you may need answers to.

I was declined by more than one company already. Do I have any options left?

Quick Answer: Yes. First, we can help you determine whether any other carriers might offer a better solution.

If they don’t, you can opt for a graded policy, which is a simplified issue product from a no exam company with more liberal underwriting requirements.

Just note that the face amounts on these policies are more limited and might not cover the full amount of your loan.

Last, you may be able to obtain coverage from a company who will insure just about anything.

The coverage can be in place in as little as 24 hours. For these providers to approve an offer for SBA loans, life insurance applications must be accompanied by the prospective loan documents.

My loan terms don’t match up with any policy terms. What do I do?

You have to choose a policy that meets or exceeds both the loan amount and duration.

Let’s look at a scenario: If you are applying for a $230,000 loan to be repaid in 7 years, it’s perfectly acceptable to purchase a $250,000 policy with a 10-year term.

In fact, in this instance, it would be much more affordable because of premium breakpoints.

Keep in mind that you could always cancel your policy in year 7 if you no longer need it.

If you were to die with the policy in force, the extra $20,000, plus the benefit remaining after the loan’s principal, will be paid to whatever beneficiary you designate.

What if my company has more than one owner?

Depending on the lender and the loan specifications, you may need a policy on each individual.

Any time there is more than one owner, the lender can make a case for each owner to have coverage in force.

The lender may question how the business would continue to operate if one or more of its key players were to pass away with an outstanding balance.

Could the business proceed to thrive and make good on its payments with the loss of an owner?

If so, you may be facing an exception that warrants a different type of agreement like key man life insurance

Can I use my current policy to secure an SBA loan?

In many cases, you can use your current life insurance policy to obtain a business loan. However, not all companies and lenders allow it.

If you already have a life insurance policy in place, you can use it to secure funding more often than not.

Usually, the only red tape is that the policy must still meet all the other requirements, including amount, duration, and collateral assignment.

In addition, you’ll need to alter the prioritization of the death benefit to cover the debt before your beneficiaries.

If your beneficiaries would struggle financially with the new arrangement, you should probably consider purchasing a supplemental policy to meet the loan’s requirements.

What if I can’t afford my life insurance premiums and loan payments?

It’s not uncommon for a new business owner to struggle to come up with premium payments out of pocket.

Most of their cash is already going into the business, and having the business make the payment each month can deplete cash flow.

The Small Business Administration understands the situation and can build the cost of the policy into the loan.

If you choose this option, consider making annual payments on the policy to take advantage of additional discounted premiums.

Should I be using a decreasing term product?

With a decreasing term policy, the death benefit goes down in line with the remaining principal. While this might seem like a great idea, it’s usually inefficient.

The truth is, a decreasing term product will cost you more than a regular term policy.

In addition, with a regular term policy, the difference in death benefit and remaining principal goes to whomever you designate.

Note: You should never assign the lender a percentage of the death benefit–it would change every year!

If you have more questions, we’ve got answers.

Start with step one above and get quotes today to see what rates you could be eligible for.

Author:

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Jason Fisher

Jason Fisher is the founder and CEO of BestLifeRates.org, LLC. and a multi-state licensed life insurance agent who has helped over a million Americans seek out affordable coverage, compare quotes, or get their family and businesses covered.

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