If you’re applying for an SBA (U.S. Small Business Administration) loan, you’re probably aware that you are required to secure your loan with life insurance. Shopping for life insurance might not be the most exciting part of starting or growing a business, but consider it an exercise in entrepreneurship. Life insurance is just one of the many things you will have to learn and tackle as a business owner.
JRC receives calls from business-owners-to-be every day, many of whom hadn’t even considered life insurance until noting the SBA requirements.
This article will put you on the fast track to securing the necessary life insurance for your loan, without overspending or having the many options fly over your head. In the end, you’ll be one step closer to building the business you envision!
Quick Article Guide
1. Why Do I Need Life Insurance for My SBA Loan?
2. When Should I Start Shopping for Life Insurance?
3. What is Term Life Insurance?
4. What is a Collateral Assignment?
5. Is There a Way to Accelerate the Process?
6. How Much Should I Expect to Pay for Coverage?
7. I Have a Health Issue…Can I Still Get Coverage?
As you have probably gathered, the SBA doesn’t give out loans without some due diligence. You have likely submitted or are in the process of gathering everything from your résumé to your business plan to your bank statements and more.
Are you familiar with the SBA Standard Operating Procedures? Under 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.
If you die before the SBA loan is repaid, your lender would receive the death benefit from your life insurance policy, eliminating your debt. This allows your business to continue functioning and prevents your immediate family members from becoming responsible for the balance of the loan.
The answer to this question is “as soon as possible.”
Once you’ve determined your SBA loan amount and begun the process, it’s definitely time to apply for life insurance.
Many clients come to us with a loan ready to be issued but withheld until they meet the final unfulfilled requirement of life insurance. This creates extreme anxiety for them, as they are only one final step from securing the loan, but that final step can take up to 6 weeks to be complete.
You should also take the opportunity to view the bigger picture of life insurance. The loan is the trigger for needing it, but what about your family? You likely have more than the loan that you want to protect your spouse from: mortgage, loss of income, children’s college costs, etc. Being that we are independent agents seeking only to find you the right policy for your needs, you can take this advice as genuine and non-sales driven.
Term life insurance is the least expensive and most common type of life insurance purchased for an SBA loan.
Term life means that your coverage will expire after a set number of years. Terms are available from 5 to 30 years in five-year increments—10 years is usually sufficient for insuring an SBA loan.
However, if you are young and in good health, you might want to take advantage of the favorable rates available to you by locking in coverage for longer.
The benefits of term life insurance are:
- 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
The balance of an SBA loan reduces over time as you make payments. 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 can orchestrate what is called a collateral assignment.
A collateral assignment allows the insurance company to pay your lender what they are owed, with the balance paid to your beneficiary.
Here’s how it works:
- Name your spouse or family member as the beneficiary on your application.
- Once the policy is approved, initiate 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.
Example of a Collateral Assignment
You took out a 10-year SBA loan for $600,000 with a corresponding term life insurance policy.
After 6 years, your loan balance has been paid down to $200,000, but your life insurance policy still has a $600,000 death benefit. If you died at that time, your lender would receive their $200,000 (probably saving your business and possibly even your home), while your family would receive the $400,000 death benefit balance paid to them tax-free.
If your health is average or better, you may qualify for a non-medical term policy, meaning you do not have to take a medical exam to secure coverage.
- Up to $1,000,000 in term life insurance is available for SBA purposes without an exam when applying before age 50. Policies can be approved in as little as 1 hour.
- Up to $400,000 term life insurance is available for SBA purposes without an exam when applying between ages 50-60. Policies can be approved in a little as 2-3 days.
Qualifications vary depending on where you live. Nevertheless, we usually encourage clients to take a medical exam for life insurance.
With a standard, free physical, you can broaden your options exponentially while also lowering your rates. As a middle ground, we’ve helped clients in a time crunch begin with the no-exam option, secure their loan, take a medical exam, and replace their original policy with one at a lower cost. We have the experience and expertise to get creative for you!
Most of our clients will purchase an SBA loan term policy with guaranteed rates for 10 years. The idea behind this logic is that most SBA loans are paid off within the first 10 years, and a 10-year policy is generally the lowest cost policy you can buy.
Below are sample 2015 rates from an AM Best A-rated life insurance carrier specializing in low-cost term coverage for men and women applying between ages 40-70. Life insurance rates correspond to a 12-level risk scale based on an applicant’s health. These sample rates are for “Preferred Best” rates, the top rate class, reserved for individuals in excellent health. Even if you have a few minor health issues, such as high blood pressure or high cholesterol, you might still be able to get approved at these rates.
Recently, we had a 74-year-old client who had decided to open a bar/restaurant in the Washington state. His wife was lightheartedly ready to have him out of the house, and he was happy to oblige! We helped him prepare for his life insurance medical exam, and even at his advanced age, we were able to secure him coverage in the “Preferred” rate class. He is now experiencing the joy of running his pub in his hometown of Spokane.
If you have had a more serious health issue, or perhaps you were previously declined for life insurance, we may still be able to help you find coverage. Every life insurance company has its own unique underwriting guidelines (requirements), and oftentimes we’re able to get clients approved even if they are considered “high risk.”
Most of the big-box insurers focusing on home and auto insurance are not competitive when it comes to life insurance. Their agents are “captive agents,” meaning they can only sell for their company. Meanwhile, as an independent agency, JRC is able to shop dozens of carriers to help you find the best options.
More Questions? Give Us a Call!
JRC offers superior customer service and decades of combined experience in helping clients secure an SBA loan with life insurance. Our agents will answer all of your questions and correspond with your lender as needed to ensure that the life insurance requirements for your SBA Loan are completed as quickly, thoroughly, and efficiently as possible.
You deserve to get your business up and running without the hassle of calling various providers. If you need life insurance for an SBA loan, call us today at 855-247-9555 and get a free quote. You might also want to try our life insurance calculator to get an idea of what you need.