For all the small business entrepreneurs and self employed people out there this article is for you. The subject of business owner life insurance is exhaustive. This article will focus on a more nuanced part of the whole. If you find that you need to get a small business loan in order to properly fund your business start up with working capital, to help grow your business, to purchase fixed assets, or for some other business oriented reason then our Guide to Life Insurance for SBA Loans will help clear the waters and give you the knowledge you need to make an informed decision.
The fastest way to get coverage fast is with a no medical exam life insurance policy.
Life Insurance for SBA Loans
Do you need life insurance to cover an SBA loan or bank loan, fast? Consider no medical versus exam life insurance now to get to the next phase of the loan process. You can always reapply for a traditional term or universal life insurance policy later once you have your life insurance in place but at least you are not risking a delay to your loan approval.
2020 SBA Loan Life Insurance Requirements
You may be wondering, “Why is life insurance needed to secure a small business loan?”
Life insurance and disability insurance may not be required to secure a small business loan, however, depending on the risk they may require that you have a life insurance policy and may require you to name the lender providing the loan as the beneficiary. This can be required if a loan is not fully secured.1
Essentially, sba.gov states that lenders should (as compared to must) require the borrower to secure life insurance if the borrower is a key man (i.e. vital to the continuation of the business). Although sba.gov does not currently use mandatory language, most small business owners would be hard pressed to find a lender that does not require a SBA loan be covered by life insurance, unless there is no concern over whether the business could survive in the absence of an individual or small group of individuals.2
The best way to ensure you are getting the right life insurance for your loan is to speak with a licensed life insurance agent.
A solid small business loan life insurance tip is to understand collateral assignment. Many sole proprietorships and partnerships are in need of funding to get the business off the ground. As a result, a small business loan will be utilized. Small business loans and hard money loans typically will require life insurance on the borrower to be paid to the lender if the borrower dies while the loan is outstanding.
But the question becomes, who do you name as the beneficiary of your SBA loan life insurance policy?
The answer: instead of naming the bank or lender as the beneficiary, the owner of the life insurance would assign the proceeds to the lender via a collateral assignment. The beneficiary would be named separately, apart from the assignment.
How it works is the life insurance proceeds are assigned to the lender. However, since the proceeds are assigned and the lender is NOT the beneficiary, the lender will only receive the portion of the life insurance that will cover the loan.
As the SBA loan is paid down, the amount owing to the lender is reduced. However, the life insurance death benefit stays level. So by using a collateral assignment, if the owner/insured dies, the lender is paid back the amount it is owed and the remainder of the life insurance will be for the benefit of a beneficiary, such as a wife or kids.
If you do not use a collateral assignment and instead make the bank the sole beneficiary, the bank will be able to collect on all the life insurance payout, regardless of the amount the bank is actually owed.
How to set up collateral assignment for a small business loan
The policy owner or your agent (typically the insured) must request a collateral assignment form from the insurance carrier once your policy is approved. This can be done quickly if you have an agent who is on the ball.
From there, your life insurance needs to go in force. Once your policy is active the collateral assignment will be submitted to the carrier. The lender will require notice that the collateral assignment has been made by the borrower. This is typically done by the life insurance company sending out a copy of the accepted collateral assignment form. This can take up to two weeks to accomplish which is why you should apply for life insurance right away when considering applying for a SBA Loan.
Consider keeping the life insurance after your loan is paid
If you still have a few years or more left on your term life insurance for an SBA or bank loan you might want to consider keeping the policy since you were much younger when you originally took it out. Further, most companies offer a conversion option that allows you to convert all or a portion of the coverage into a permanent policy. The advantage here would be for a business owner who has been successful and now want to keep his or her life insurance. The good news is that with the conversion option you can keep it—and your policy is converted at the rate class you originally qualified for. There is no proof of insurability—meaning even if you have developed some sort of illness or disease you don’t have to submit to an exam.
Types of Life Insurance to cover an SBA loan
SBA loan life insurance requirements specify either a decreasing term or universal life insurance policy. However, a fixed term works just as well as a decreasing term and is a superior product.
Annual Renewable Term:
Term Life Insurance
Term life insurance for an SBA loan is a great choice because it is typically very inexpensive and you can tailor the term to match the length of the loan. Term lengths available range from 5, 10, 15 year terms and every year from there up to 30 years. That means you can get a 17 or 22 year term if that is necessary. You can even get a 35 year term with a return of premium rider if you are looking for something that far out.
10-year term monthly sample rates
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Sample quotes based on Clearlink partner and are for illustration purposes only. Actual quotes may vary. Rates are based on healthy male. Data effective 11/27/19.
Universal Life Insurance
Universal life is permanent life insurance. There are various flavors but the traditional three types of Universal Life are Guaranteed, Indexed, and Variable. Of these three, Guaranteed Universal Life is going to be the most inexpensive available.
You might think that cash value permanent life insurance is the best choice. After all, it does have many benefits, such as subsidizing your retirement income, providing guaranteed growth and cash value accumulation, in addition to a death benefit that lasts our entire life.
But unless you plan on keeping the policy for the rest of your life to provide for family, estate planning purposes, or as a business succession device, term life insurance is typically the prudent choice for life insurance to cover a small business loan.
SBA loan additional tips
There are a lot of intricacies in determining the best way to provide life insurance to secure your SBA loan. We have a couple of extra tips and tricks to help you easily navigate the waters.
Stacking life insurance policies
What do you do if you need life insurance for a SBA loan fast but you can only get up to $500,000 of no medical exam term life insurance but you need more? Principal Financial Group will offer a preferred plus candidate up to a million dollar life insurance policy. But what if you are not in perfect health? What do you do?
The answer would be to stack a couple no exam policies together. You can get up to $500,000 in coverage with a few of the top no medical exam companies in the marketplace. By stacking two $500,000 policies, you can obtain the $1,000,000 in coverage you need.
What if the policy lapses?
If the small business loan life insurance policy should lapse then the Lender would consider the loan in default and can request the entire principle of the loan be paid in full. This is a good reason why you should consider paying your premium on your life insurance to cover an SBA loan on an annual basis. Annual payments are about 5% less than paying monthly.
High Risk Life Insurance to cover an SBA Loan
For those of you who need coverage but you have some sort of pre-existing condition you should consider an agency that specializes in high risk life insurance conditions. For example, looking for life insurance with diabetes is going to require that you apply with the most diabetic friendly life insurance carriers. If you don’t, your policy could be delayed, postponed or declined altogether.
Disability insurance for small business owners
As a small business owner, a disability can severely hurt your business. Without the proper business owner insurance protection in place you will not be able to pay on your small business loan, continue to make life insurance premium payments, pay rent, and any other debts you may have, including personal debts, such as a home mortgage. By making a relatively small monthly premium you can secure disability insurance that will provide you with additional peace of mind should you suffer a disability.
There are two types of private disability insurance to consider, short-term disability insurance and long-term disability insurance.
Short term disability insurance can go into affect immediately and pay you income from the insurer as of day 1 if you are disabled due to an accident.
Long term disability insurance typically requires an elimination period before your benefit period begins. Upon completion of the elimination period, the insurer will send you a monthly income benefit.
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