Life insurance for SBA loans is required when business owners borrow to help grow their business.
However, before you apply for a loan, it’s important 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 4 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.”
Number 4 is dated – ‘a decreasing term policy is most appropriate.’ The problem with this is that few decreasing term policies are available in the market.
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.
The reason why life insurance is needed is that if you die, your small business may die with you.
If you’re not familiar with the application process, you may want to check out our Life Insurance for Dummies guide.
How does life insurance work with an SBA loan?
When your bank requires a life insurance policy in order 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 owner of the policy and you can name your business as the beneficiary.
A collateral assignment is then added to the policy.
The assignment ensures that the bank is protected if you die, and it benefits you as the bank will only receive what they are owed, not the entire death benefit.
If you have multiple owners of the business, the SBA may require key person life insurance for all owners.
Conclusion
When you’re looking to borrow money through an SBA lending program, life insurance is going to be a requirement. With RiskQuoter, we’ll make sure you get the life insurance you need at the best possible price.
Get a quote today!
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