Complete Guide to Life Insurance for an SBA Loan

life insurance for an sba loan - everyday life insurance

Entrepreneurs, like yourself, might be surprised to learn that the Small Business Association (SBA) does typically require business owners to have life insurance prior to releasing business funding. 

Let’s break down what you need to know about how SBA loans and life insurance coverage are connected. These tips will help you better prepare for getting the cash you need to make your small business dreams come true.  

Do You Need Life Insurance for SBA Loans? 

First, it’s worth noting that the SBA is not a financial institution, so they aren’t actually loaning anyone money. Instead, the SBA connects their vetted entrepreneurs with a robust roster of approved business lenders. 

In turn, the SBA agrees to back a portion of the loan on behalf of the business owner. This support is what often makes the bank willing to loan money, particularly to new business owners. At the same time, the SBA must be sure their investment in your business is protected, too. 

This is the reason for the life insurance requirement. By having life insurance coverage, the SBA is guaranteed the loan will be paid in full in the case of a business owner’s untimely death. 

Factors That Determine If You Need Life Insurance

The lender will usually complete an assessment of the business, including an understanding of how viable the business would be without the main principle. 

Essentially financial institutions ask themselves this: Could your business survive even if you were to pass away? Or are you the heart of the business and, therefore, your death would cause the business to cease operations? 

Bottom line: if the lender determines you are key to the ongoing success of the business then they will ask you to get life coverage (sometimes called “key person insurance”). 

Do All Lenders Make Business Owners Get a Life Insurance Policy? 

Well, not exactly. Often how the small business is structured is what ultimately determines if a lender requires life insurance. 

Below are the four most common business structures that will usually warrant life insurance in order to borrow funds from any lender. 

  • Sole proprietorships
  • Certain partnerships (e.g. law firms, medical practice)
  • Single shareholder S or C corporations
  • Single member Limited Liability Companies (LLC)

Here are general guidelines to help you better understand the rules of life insurance for SBA loans. 

  • SBA 504 loan: life insurance is needed if your collateral isn’t quite enough to cover the full loan amount. For instance, if your SBA 504 loan is for $100,000 and your collateral is only $70,000 then you’ll need life insurance for sure. If your collateral does cover the loan amount, you may be able to skip the life insurance coverage. 
  • SBA 7(a) loan: typically asks for life insurance to equal the full loan amount. In some situations, the life coverage amount may be lowered if you’ve already pledged plenty of collateral. 

Which Life Insurance Coverage Is Acceptable for SBA Loans? 

Now that you have determined you’re gonna need life insurance coverage, let’s explore the five key points your insurance will need to meet. 

4 Common SBA Life Insurance Requirements

  • Policy Value: the value of your life insurance policy should meet or exceed the outstanding amount due on the SBA loan. You’ll be expected to maintain this policy amount throughout the loan years. 
  • Active Policy Status: your life insurance policy should already be in effect before the loan will be issued. 
  • Collateral Assignment: a proper collateral assignment should be documented prior to the loan being issued. 
  • Length of Coverage: your life insurance coverage must remain in effect throughout the loan’s repayment time frame. 

Please be aware: should any of these criteria not be met, even if you’re just waiting on the life insurance policy to be approved, your small business loan application will most likely be denied

Steps for Getting Life Insurance Coverage

The average turnaround time on life insurance applications is 4 to 6 weeks. However, at Everyday Life Insurance we use advanced technologies to bring that turnaround time down significantly. Using our online life insurance calculator, most customers get an approved policy within just 20 minutes

If you know that you’ll need life insurance for your small business loan, it’s time to start shopping. 

How to Get a Life Insurance Policy Online

Typically, getting life insurance for an SBA loan includes finding an insurance agent, making sure the term is longer than the loan’s repayment schedule, applying, releasing records, scheduling a medical exam, and undergoing so many more steps.

With our Ultimate Online Life Insurance Calculator, all you need is 3 minutes to get a policy recommendation and price quote. Use the calculator to answer some simple questions about your needs & circumstances. Our online application process is available 24/7 and ready to provide you with customized coverage. 

Still, you’ll need to make sure your life insurance policy meets the 4 requirements outlined above. That includes ensuring the term is the same (or longer) than the loan’s repayment schedule. 

For example, If you have an SBA loan of $200,000 and you agreed to pay it back in ten years, then you need to  get a 10 year term life policy with a $200,000 death benefit. 

Have questions? Contact our team for fast & friendly support.

How Much Does Life Insurance Typically Cost? 

The cost for life insurance is always unique to the covered insured. Your monthly premiums will be based on your specific insurance needs and your personal information such as medical history. Our plans start as low as $3.65 per month. 

Can’t I Use My Existing Policy for an SBA Loan? 

If your existing life insurance coverage was purchased to protect your family’s finances should you pass away, then it’s advisable to buy separate life insurance for SBA loans. You see, collateral assignment rules for SBA loans will most likely obligate you to assign the benefits to the SBA until your business loan is paid in full. If anything happens to you during that loan period, your life insurance benefits would go to pay the loan off rather than protecting your family’s financial needs. 

How Can I Afford My Loan and Insurance Premiums Too?

Small businesses often operate on a much tighter budget than larger, more established companies. This means it could be difficult for small business owners, like yourself, to pay a life insurance premium on top of a monthly loan payment. 

The SBA understands this dilemma so they often build the cost of the policy into the loan payment. Or you may want to consider making one premium payment annually and take advantage of any pay-in-full discounts the insurer offers. 

What If I’m Not the Only Business Owner? 

In this case, the financial lender might require each individual owner to have their own active life insurance policy. The main question for any lender is whether the business will still be able to make loan payments despite the passing of one or more owners. 

If the business will be unable to continue paying the outstanding loan balance because of one particular employee (or owner), then the bank will often push for a “key person life insurance” policy instead of multiple coverage plans. 

What is Key Person Life Insurance Coverage? 

Small businesses that have investors, shareholders, and multiple owners should consider getting “key person” life insurance coverage. This type of life insurance can pay for a replacement executive or reimburse investors should the “key” employee become disabled or pass away.

How Does Collateral Assignment Work? 

In some cases, you may be required to have a collateral assignment established. For instance, if you are borrowing $350,000 or more then the SBA automatically requires a collateral assignment. Other factors that might come into play are the amount of collateral you put down, your credit score, if the SBA is willing to guarantee the loan, and your level of active participation within the company. 

The basic terms for collateral assignment are usually as follows: 

  • The loan borrower must also be the owner of the life insurance plan
  • Lender should be listed as designated assignee
  • The loan borrower is the designated lendee
  • Lender collects up to the total amount still to be repaid on the outstanding loan
  • Collateral assignments terminate after the small business loan is paid off

Should You Get Life Insurance? 

Both life insurance and business financing are unique to each business owner’s needs and expectations. Even if your lender does not require you to buy life insurance to secure a loan, you may want to still consider doing so. The same way a traditional life insurance policy is meant to protect your family’s future, life insurance can protect the future of your business as well. Keep in mind, your customers, employees, and business partners are all relying on the future success of your business too.  
See what life insurance offers are available to you now, with our online life insurance calculator.

Disclaimer: The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.

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