Congratulations! You’ve taken the leap into entrepreneurship and are ready to turn your vision into a reality. The U.S. Small Business Administration (SBA) has even indicated they plan to back your venture with a loan.
But wait. What’s this…you need to have life insurance in order to get an SBA loan?
Immersed in the excitement of starting a business, many first-time founders overlook the less exciting requirements for receiving an SBA loan—such as life insurance. The SBA doesn’t hand out loans without protecting themselves. Under SBA SOP 50 10 5 (B), any SBA loan for a business that “is tied to an individual or individuals” requires life insurance to protect the lender and the owner’s family. Life insurance policies purchased for SBA loans must be for the full amount of the SBA loan, with your lender named as primary beneficiary.
Finding and getting approved for a life insurance policy might sound like a major hassle. But, with the help of this guide and an independent life insurance agent, you can move through the process quickly and secure the SBA loan you need to launch your business.
Quick Article Guide
1. What is Term Life Insurance?
2. Why Do I Need Life Insurance for an SBA Loan?
3. I’m in a Hurry…How Fast Can We Make This Happen?
4. What if I Have a Health Issue?
5. Can I Drop the Life Insurance After the Loan is Paid Off?
6. What is a Collateral Assignment?
7. Any Other Types of Life Insurance I Should Consider for my Business?
8. Where Do I Start?
The most common type of life insurance purchased for an SBA loan is term life insurance. Term life provides coverage for a set number of years, or your “term,” which might be anywhere from 10 to 30 years. A 10-year term is usually sufficient for insuring an SBA loan, as you would hope to have your business on solid ground and the loan paid off by then.
Aside from being a requirement for an SBA loan, life insurance is meant to protect your family from potential financial hardship in the event of your death. Your face amount, or “death benefit” is paid to your spouse or heirs upon your death, allowing them to cover any loss of income and pay off any debts you might have, such as a mortgage or a major loan like the one you are pursuing from the SBA.
With this in mind, consider taking a more holistic perspective to life insurance, rather than getting it simply because you have to.
If you are young and in good health, we recommend taking advantage of the favorable rates available to you by locking in coverage for the maximum term of 30 years. Term life insurance is great because you can count on:
- Affordable coverage
- Flexible options
- A fixed rate for a set period of time
- No startup costs
- No surrender charge
- No hidden fees
- Freedom to cancel or change your policy at any time
Many clients in need of life insurance for an SBA loan are up against a tight deadline for securing their loan. For those in average health or better, we frequently orchestrate non-medical exam term life policies. This means exactly what it sounds like: you don’t have to go through the hassle of taking a medical exam, waiting on your doctor(s) to send the underwriter your medical records, and awaiting the results.
Non-medical policies up to $1,000,000 are available for SBA purposes to those applying before age60 and $500,000 before age 66. With some client’s, we’re able to get an approval in as little as 1 hour. Those ages 50-60 can get approved for up to $500,000 within a couple of days to a week. It is also possible to stack multiple non-medical policies for a larger loan.
Nevertheless, if you’re not in a pinch for time and have started shopping for life insurance early on during the SBA loan process, we encourage you to take a medical exam for life insurance. With a standard, free physical, you can broaden your options exponentially while also potentially lowering your rates.
As independent agents with years of experience in the life insurance industry, we can also provide a middle ground solution: buy a no-exam policy first to secure your loan, and then go back and take a medical exam afterward so you can replace your original policy with one at a lower cost.
If you have had a serious health issue, such as a diabetes or a history of heart disease, it doesn’t necessarily mean you can’t qualify for affordable life insurance. Every life insurance company has its own unique underwriting guidelines (requirements) when approving a policy and some companies are more lenient with health issues than others. By working with dozens of top-rated companies, oftentimes, we’re able to get clients approved even if they are considered “high risk.” Before you assume that you are uninsurable, read our previous article featuring 13 serious health problems that don’t rule out life insurance.
After you have paid off the full balance of your SBA loan, you might consider dropping your life insurance coverage. The great thing about term life insurance is that you can cancel your policy at any time, with no extra charges or penalties.
That said, we usually recommend for clients to keep their life insurance even after paying off their SBA loan, if the policy could benefit their loved ones, unless they are having a difficult time affording the monthly premium. Instead of canceling your plan, the savvier thing to do is to first reevaluate your life insurance needs with the help of a knowledgeable life insurance agent.
Naturally, as you make payments on your SBA loan, the balance decreases. Meanwhile, the balance of your term life insurance death benefit stays the same.
To prevent your lender from being overpaid in the event of your death, JRC recommends setting up what is called a collateral assignment.
A collateral assignment allows the insurance company to pay your lender only what they are owed, with the balance paid to your beneficiary.
Here’s how it works:
- Name your spouse or family member as the primary beneficiary on your application.
- Once the policy is inforce, execute a collateral assignment to your lender.
- If you die, the insurance company first pays off the lender.
- The rest of the death benefit is issued to your primary beneficiary (spouse or family member).
Your thought might be to just name your lender the primary beneficiary, but that’s neither desirable nor reliable. Most insurance companies won’t approve 100 percent of an SBA loan, because they know it will be paid down relatively quickly. On the other side, the SBA won’t fund a loan that is only insured for a portion.
Collateral Assignment Example
Steve took out a 10-year SBA loan for $500,000, with a corresponding term life insurance policy.
After 6 years, Steve’s loan balance has been paid down to $100,000, but his life insurance policy still has a $500,000 death benefit. If he died at that time, Steve’s collateral assignment would allow for his lender to receive their $100,000, while Steve’s family would receive the $400,000 death benefit balance paid to them tax-free.
If you are going into business with partners and/or hiring employees, you will likely cross paths with life insurance sooner than later. Businesses often purchase key person life insurance for their executives to protect the business if they were to suddenly pass away.
Key person or key man policies are paid for by the business and in the event that a key employee passes away, the payout from the insurance policy can be used to recruit, hire, and train a new employee. The life insurance payout also provides a temporary income cushion to protect the business from lost profits or a decrease in earnings.
Another popular reason that businesses purchase life insurance is to fund a buy-sell agreement. With a buy-sell agreement, life insurance is purchased on each of the business owners. If one of the business owners passes away, the money is often paid to their surviving family as a way of buying out their share of the business. This allows the business to continue to operate without having to liquidate company assets to settle the deceased owner’s share of the business.
Securing an SBA loan requires a great deal of time and work. Let JRC Insurance Group shop dozens of top-rated carriers for you to find the best coverage at the lowest rate, so you can focus on the more enjoyable and exhilarating aspects of running your own business.
Call us today at 855-247-9555 and get a free quote. You might also want to try our life insurance calculator to get a ballpark figure for what you can expect to pay for life insurance. We’ve helped hundreds of businesses with life insurance for their SBA loan and we can help you too.
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