Need life insurance to meet SBA loan requirements? Not a problem.
On a tight deadline and need it 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.
The Requirements of Life Insurance for SBA Loans
When you’ve applied for a small business loan, life insurance may be required by the Office of Capital Access within the Small Business Administration. Taken directly from SBA Loan Closing Document for 7(a) loans:
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.
Although the excerpt suggests life insurance may not be required for all loans, a vast majority of cases 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 force behind the business will be required to have life insurance in order to be granted approval for funds from the SBA.
There are four key factors to the life insurance policy being accepted as satisfying the loan requirements and guidelines:
- The life insurance policy must be in force with the primary revenue creator or owner (often the same) before the loan can be issued.
- 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.
- The life insurance policy duration must match or exceed the required repayment term duration for the applied loan.
- A proper collateral assignment must be documented prior to approval.
If any of these are not satisfied, even if the insurance is applied for and simply not yet approved, your loan application can and will be denied.
Next, let’s go over the process you will go through step-by-step.
Step 1: Gathering Information
The number one issue we tend to run into is a prospective borrower already fast approaching their deadline, and they’ve not even begun the process. Life insurance, on average, industry wide, takes 4-6 weeks for a fully underwritten policy from application to going in force. It can take longer! It’s time to gather your numbers and get the ball rolling immediately.
Begin by getting a life insurance quote for the amount of your loan, with a duration that, at minimum, matches the loan terms. In other words, if you are requesting an SBA loan of $250,000 and have agreed to pay it back in ten years, you simply need to shop for a 10-year $250,000 term policy.
If you are on a deadline, you’ll need to let us know. We do have policies we can have in force in as little as 24 hours, but they will cost more per thousand. If you have at least a couple weeks, we can utilize a no exam life insurance policy and be approved within a few days or weeks and split the difference in costs of a fully underwritten term policy (cheapest option) and the 24 hour approval process (most expensive).
Step 2: Application Process
As mentioned above, the typical, fully underwritten life insurance policy (meaning you’re completing an exam and giving access to your records) takes 4 to 6 weeks.
Applying, in itself, is several steps:
- Medical Exam
- Release of Records (completed by insurance company)
The application is the first step. A standard application consists of contact information, beneficiary information, medical questions and terms of the policy you’re looking to get.
Once completed, you’ll schedule an exam with a third party exam company to complete the physical. At this same time, you’re giving permission to release your MVR (motor vehicle record), medical records, criminal records, driving records, and prescription database information.
Once all pieces of information have been acquired, the application and its corresponding documents reach an underwriter.
If enough information is available, the underwriter will assess the risk and either approve or decline. If more information is required, an APS (attending physician statement) can be ordered, meaning they’re getting direct access to your medical files from your doctor. Once received, the underwriter can continue.
Upon approval, you’ll be asked to sign in agreement to the terms of the policy and it’s premium, and make payment. Once payments are up to date and the delivery is complete, your policy is now considered in force, or active.
Step 3: Collateral Assignment
The life insurance for an SBA loan must be collaterally assigned, meaning agreed among each party how the benefit will be distributed if death occurs. This is to ensure the order of debt repayment.
Your outstanding principal with the SBA will now be highest priority, with any remainder of death benefit to be distributed at your discretion.
This is usually just a simple document, but understand not every life insurance company authorizes this type of arrangement. It must be notarized and recorded with the life insurance company’s legal department, which may take up to two weeks. We will help get this done for you.
Again, this entire process from start to finish will average 4 to 6 weeks, assuming there aren’t too many extra hurdles to jump. These hurdles might include additional steps of financial verification, more than one request for medical records (usually in the case where more than one doctor, surgeon, or specialist has been seen), or other standard approval requirements.
Frequently Asked Questions About SBA Loan Life Insurance Policies
I was declined by more than one company already. Do I have any options left?
Quick Answer: Yes. We will look to see if any other carriers might offer a better solution first, and if the result would be the same, we have two separate options.
- We can attempt to use a graded policy, which is a simplified issue product from a no exam company and has more liberal underwriting requirements. The main issue we run into with these is face amount. There are limits to the coverage amount, and it may not be enough to cover the entire loan.
- The other option is a solution from a single company who will insure just about anything. The coverage can be in place in as little as 24 hours. For them to approve an offer for SBA loans, life insurance applications must be accompanied with the prospective loan documents.
My loan terms don’t match up with any policy terms. What do I do?
Quick Answer: Choose a policy which meets or exceeds both the loan amount and duration.
- Let’s say you are applying for a loan which is $230,000 to be repaid in 7 years. It’s perfectly acceptable to find a policy which is $250,000 and a 10-year term (and, in this instance, would be much cheaper because of premium break points). You can always cancel your policy in year 7, if it’s not longer needed. If you were to die while in force, the extra $20,000 plus the benefit remaining after principal paid will be paid to whomever you designate.
We have more than one owner. What do you suggest?
Quick Answer: You may need a policy on each. In some cases, you may need a different arrangement.
- Any time there is more than one owner, the lender can make a case for both (or all) to have coverage. The main factor here is how the business would continue to operate if one or more were to pass away with an outstanding balance. Could the business continue and make good on it’s payments with the loss of an owner? If so, this could become an exception where a different type of agreement may need to be set up.
I already have a policy. Can I use it?
Quick Answer: Many times, yes, you can. However, not all companies and lenders allow it.
- If you already have a life insurance policy in place, you can use it more often than not. The only red tape is it must still meet all the other requirements, including amount, duration, and collateralization. In addition, you need to understand the priority of the death benefit now lies towards paying the debt, not your intended beneficiaries. If your beneficiaries wouldn’t gain the same advantages of having a lesser amount upon receipt, consider a supplemental policy.
With the new loan payments, I’m not sure I can afford the premiums. What can I do?
Quick Answer: Many lenders will allow you to build the cost of the policy into the loan.
- 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 this, and can build the cost of the policy into the loan. If you consider doing this, consider making annual payments on the policy to take advantage of additional discounted premiums.
Shouldn’t I be using a decreasing term product?
Quick Answer: No. Not only will you pay more, but there is an opportunity loss in death benefit.
- This is a great question. A decreasing term product is one where the death benefit goes down in line with the remaining principal. While it seems great, it’s inefficient. The truth is, it will cost 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: Never assign the lender a percentage of the death benefit–it would change every year! Ask us for help here.)
You may have other questions, and we’re here to help. Start by requesting a quote, and we’ll make sure you’re insured by the time you need it.