By Michael Horbal – updated on – 09/21/2022
Business owners must take out life insurance when they borrow from the SBA to help grow their businesses.
However, before you apply for a loan, it’s essential to understand the SBA collateral requirements.
What is life insurance for SBA loans, and why do you need it?
When life insurance for SBA loans is required, SOP 50 10 5(B) must be followed by lenders.
And while you can read this exciting 388-page document, I’ll tell you now that there are only four requirements regarding life insurance:
- “Lender must determine if the viability of the business is tied to an individual or individuals. In these situations, the lender must require life insurance. SBA Express and Pilot Loan Program lenders may follow their internal policy for similarly sized non-SBA guaranteed commercial loans.”
- “Life insurance required must be consistent with the size and term of the loan. The amount and type of collateral available to repay the loan in the event of the death of the borrower may be factored into the determination of the appropriate amount of life insurance.”
- “For each policy required under this paragraph, lender must obtain a collateral assignment, identifying the lender as assignee, that is acknowledged by the Home Office of the Insurer. The lender must assure that the borrower pays the premiums on the policy.”
- “The lender may accept the pledge of an existing life insurance policy. When a new policy is required, a decreasing term policy is most appropriate. Credit life insurance or whole life insurance should not be required.”
The problem with number 4 is that it states that a decreasing term policy is most appropriate. However, decreasing term policies are junk, overpriced, and don’t compare to the level term life insurance policies available.
A level-term life insurance policy is a better option at a lower price.
If you have high-risk health issues that make you uninsurable, a contingent coverage policy may be acceptable to banks.
A contingent coverage policy is an insurance policy for times when no other option is available.
If you’re not familiar with the application process, you may want to check out our Life Insurance 101 guide.
You can now get $500k of life insurance with no exam, sometimes within minutes. The process involves getting your records using the Human API process, checking the Medical Information Bureau, and reviewing your background, such as family medical history.
Get a term policy with an excellent conversion privilege, as it may allow you to sell your policy in the future should you no longer need it.
You may convert the policy to universal life or whole life insurance.
Correspondingly, you should also consider policy riders that might appeal to you, such as accidental death, waiver or premium, and return of premium riders.
How does life insurance work with an SBA loan?
When your bank requires a life insurance policy to lend you money, here’s how it works.
You can use an existing policy if you have one, or you’ll buy a new policy for loan purposes.
It doesn’t matter what type of life insurance you use for the loans.
You or your business will be the policy owner and can name your business as the beneficiary.
The policyholder then adds a collateral assignment.
The assignment protects the bank if you die and benefits you as the bank will only receive what they are owed, not the full death benefit.
If you have multiple business owners, the SBA may require key person life insurance for all owners.
You can name your spouse the beneficiary if you’re a sole proprietor. The bank would still get their loan proceeds, but your spouse would pay the balance.
What should you do if the SBA waives the life insurance requirement?
SBA lenders have notified several clients that they no longer require life insurance as part of their loan.
What should you do if this happens to you?
Should you cancel your life insurance application?
Take a look at your loan…what happens to the loan if you die?
The amount of life insurance you get to cover this loan may help your family if you die.
Most SBA loans have provisions in your loan documents that give the SBA a security interest in the assets of your business. If you die, the lender first looks to the business’s assets to pay off the loan.
Consequently, if you signed personally for the loan, the lender might also look at your assets to satisfy the loan.
Surviving family members that depend on that business to provide for them may not be able to pay off the loan if there is no life insurance.
If you are personally responsible for the loan, does the lender have a right to your assets, home, etc.?
Get life insurance even if your SBA lender does not require it. The liquidity a life insurance policy provides will help your business and/or family members make it through the difficult times.
Final Words
You must have life insurance when you’re looking to borrow money through an SBA lending program.
With RiskQuoter, we’ll ensure you get the life insurance you need at the best price.
Get a quote today!
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