Entrepreneurs interested in starting a small business often face a surprise during the loan process – the need for life insurance to cover the cost of an SBA loan. This requirement is seemingly often buried deep among a long list of other necessities in order to get the loan.
With the expansion of the SBA loan program, now is one of the best times to act. Whether you’re in the process or not it is important to know that not having a life insurance policy may halt your approval. Many entrepreneurs and business owners start frantically looking for help when learning about this requirement.
For a good reason, that is because it usually pops up towards the end of the SBA loan approval. This becomes a stalemate because the process of getting life insurance can drag out. But not to worry, we are an independent agency that specializes in life insurance for an SBA loan. If you read this blog not only will you know the best policy to get, how to get it overnight and which legal paperwork you’ll need.
In summary, here’s what you need to know about life insurance and SBA loans:
- Most of the time you will be required to get life insurance to get approved for an SBA loan.
- You can get a traditional term life insurance policy for the length of the loan. The underwriting for this can take 4 to 8 weeks so make sure to do it as soon as possible.
- If you need life insurance fast, you would have to opt for a no medical exam life insurance policy. Depending on the company, approvals can range from 48 hours to a few weeks.
- It’s important to set up a collateral assignment for your loan, although not all companies do this.
SBA Loans require any business tied to an individual or a group to provide life insurance as collateral. Getting a life insurance policy for an SBA Loan can be quite easy. The most popular route is to get a no medical exam policy. No medical exam policy can be approved within 48 hours with an electronic policy delivery.
Why Does SBA require life insurance?
One of the first things many business owners ask us is why they are required to get life insurance. The reason is that if your loan is not fully secured by assets then SBA wants you to purchase a life policy. A major concern for the administration is that if you were to pass away prematurely the loan would not be paid. This is especially true for sole proprietors, small group or business depends on a few key individuals. Which in most of the cases it is.
If you’re a larger company with a multitude of assets with a larger board then you may not be required to get a policy. You can also rest assured that this is overall a common practice with other lenders as well. Anytime a bank gives a loan to the enterprise they want to makes sure they will get their money in the event of death. Some choose to use their house, business assets or investments as collateral. This will satisfy the requirement if the value of the collateral is estimated the same or higher than the loan amount.
Even in the event that you could use your existing assets it is not advised. The reason is the last thing you want is for the bank to be taking away personal property if you die. Because it will have a direct impact on your loved ones. Besides life insurance is not a large monthly expense so is better to secure a policy than risk assets you worked so hard for.
SBA Loan Requirements
Before you run to buy a policy you need to be informed on making sure you meet the SBA guidelines. The last thing you want to deal with is going through a lengthy application process to learn your loan is denied because of a wrong policy. It is good to know then, that the guideline is pretty straight forward:
The policy must cover all causes of death
Get an all-cause coverage that will cover death in the event of accidental death or illness. For example, an accidental death benefit plan although easy to acquire would not suffice for an SBA Loan. Because if the result of fatality is anything outside of the accident the lender will not be able to collect the death benefit.
Coverage Amount
The policy must match the amount of the loan. So if you’re SBA loan is for $500,000 then your life insurance plan must be issued for the same amount or higher. Also, we usually recommend our clients to put their family members as beneficiaries. That way when you assign the policy to the lender as collateral they would only be collecting the balance of the loan. So hypothetically speaking if you passed away and only owed 300k out 500k. The lender would get 300k and your family 200k.
Length of the Policy
The duration of the policy must be equal length to the duration of the SBA loan. If your loan terms are for 20 years, you’d need to have a minimum of a 20-year term policy or longer. You can also buy a permanent life insurance plan that will cover you up to age 121. This is ideal to lock in the rate and use the policy for future loans or for personal reasons.
No waiting period
Your life insurance policy should be approved and issued with no waiting period. Some life insurance plans have a 2 to a 3-year waiting period. This means that if you passed away during that time there would be no payout.
If you follow the bullets mentioned above it will meet the SBA guidelines. However, you won’t have to stress this too much if you’re working with an experienced life insurance agency. A knowledgeable agent will make sure you get the right kind of policy.
Types of Life Insurance to Consider
Here are a few types of life insurance products to consider for your SBA loan.
Term Life Insurance
The most popular type of life insurance policy. Term life insurance allows you to get a high amount of coverage for an affordable monthly premium. This type of coverage will provide protection for a certain number of years. Protection will vary from 10, 15, 20,25 or a 30-year term. Because this policy has an expiration date the premiums are much lower.
As you can see this policy will make a perfect fit for a collateral loan assignment since you can match the length of your loan. You can also cancel life insurance policies at any time, so if you pay off your loan earlier you’re not stuck in a contract. With a term life policy when your policy ends your coverage either expires or renews annually. The annual renewal will be costly since you don’t have that locked in the initial rate. In most circumstances, people simply convert them to permanent plans or get a new term plan altogether.
If you’re the type of person who doesn’t like the idea of not having anything to show for. You may want to consider a Return of Premium Term. This is the same coverage albeit more expensive but with a great proposition. If you happen to outlive your term, you’d get every single dollar you paid for the premiums back. Think of it as putting money under the mattress while getting free life insurance.
Permanent Life Insurance
A type of policy that simply stays in force until the day you die. Permanent plans offer lifetime coverage usually until age 100 or 121 with fixed rates. Many of permanent plans also have some form of cash value accumulation. This can be a great supplement to your retirement income in the future. The cash value can also be used to have your death benefit grow. For example, let’s say you got a policy to cover you for $1 million dollars at age 35. Due to cash value growth, when you’re 70 your death benefit might be $3.5 million dollars.
All of that without having to pay anything extra into the policy. Most of our clients who get life insurance for SBA loan purposes don’t necessarily go with these types of policies. If you can afford it though, there a lot of reasons to go with a permanent plan. You’ll get to have a policy for life that can be used for your family, estate planning or even business with growing value.
Best Life Insurance Policy for SBA Loans
When securing a business loan through SBA your objective is to get a fast and affordable life insurance policy. The solution is no medical exam term life insurance. With a no medical exam policy you can skip the examination and long approval times. Typically, no medical exam life insurance can be approved and issued within 48 hours depending on the company. Currently, we have a few companies that may approve you within the same day. The best part is you can also get your life insurance application complete electronically. Once approved the policy will be emailed to you.
There are two types of policies when it comes to no medical exam, simplified issue and accelerated underwriting. Simplified issue is known as true no exam since regardless of what you answer on the application an exam won’t be required. Simplified issue plans can be secured up to $1 Million Dollars. This is the absolute quickest option having an active policy.
Accelerated underwriting plans are traditional term plans that will allow you to skip the medical exam in the event that you qualify. Even though not everyone will qualify to skip the exam. For those that do you’ll have a more competitive premium. Accelerated underwriting is also ideal for SBA Loans that are over $1 million. This is because there is a company offering up to $3 Million without an exam.
The only downfall with no exam plans is that you do have to be in good health. If you have moderate to severe preexisting conditions it is unlikely you’ll get approved. In this case, we recommend going with a fully underwritten plan with a medical examination. This is not necessarily a bad thing but the approval time takes anywhere between 3 to 6 weeks.
Using existing policy
In rare cases, some individuals may have purchased life insurance in the past and forgot all about it. If you have an existing life insurance policy that will coincide with your SBA loan you can use it. This can be a good option if life insurance is the only thing holding your loan approval back. Just make sure you have enough coverage to cover what that policy intended to. The last thing you want is to leave your loved ones uninsured.
SBA Loan Life Insurance Process and Tips
Meeting the requirement for your SBA loan with a life insurance policy can be broken down into steps. Now, don’t get overwhelmed because most of the work will be done by your agent. So let’s breakdown each step and provide some expert tips.
- Find an independent agency – When securing a life insurance plan for SBA you have to work with an agency that works with multiple companies. Most independent agencies work with 10+ carriers so you’ll save time shopping. Also, if you get turned down with one company the agency will be able to use your existing info to reapply. For example, let’s say you went to an agent who has one company. If that company turned you down, you’d have to restart the whole process with another carrier even if it took months.
- Prequalification – Once you find an agency the next step is to get prequalified to see your risk class. You’ll be asked questions about your health, background, built, family history and dangerous hobbies. Your responses will help to determine what rate you’ll pay and which company will be most likely to accept you. Don’t work with anyone that doesn’t do this vital process. A proper prequalification can be the difference between getting approved fast or not getting approved at all.
- Get Quotes – Now that you and your agent have a clear picture of your overall risk class is time to shop around. Once more this is where working an independent agency like is a benefit. Life insurance rates are fixed by the law, so by working an agency like ours who has over 30 top-rated insurers you don’t have to shop around. Not only will this save money but also save you a lot of time.
- Apply – The application process takes about 15 minutes to complete usually over the phone. When complete you’ll get a request to sign the application electronically and it gets submitted over to the carrier. If it is a no exam plan you’ll get a decision within a few minutes to a few days. Now with a medical exam plan expect 3 to 6 weeks to get approved along with a paramedic exam. The paramedic exam is when a nurse comes out to your home or place of employment. It involves the nurse drawing blood, collecting urine and checking your built.
- Underwriting – Complete application goes to the company and gets assigned to an underwriter. This is a person who will review all the details to make a final decision on your policy. Besides the application details, they will also request information from Motor Vehicle Records, Medical Information Bureau, Pharmacy Records, and soft credit check.
- Decision – Your application will either get approved as applied, rated or declined. If you’re approved you’ll get your policy within a week or instantly if you went with no exam. In the event that the underwriter found some information that wasn’t disclosed on the application you may get rated up. This means you’re approved but your monthly premium will be higher than applied. If your overall health or background information is considered severe you will be declined. If you do get declined there are alternatives.
- Collateral Assignment Form – Congratulations, you’re approved for life insurance! But there is just one more vital step to complete for your SBA loan. You need to assign the policy as collateral to the lender. The reason we advise our clients to set up a collateral assignment versus directly listing the lender as a beneficiary is to make sure the lender only gets the balance. So be sure to list your family as beneficiaries of the policy and fill out a collateral loan assignment form for the lender. This form will be provided to you by the carrier and is usually one page long.
For example, if you had a loan for $750,000 and you paid it down halfway and were to pass. The lender would get $375,000 and your family would get $375,000 as well if you set up a collateral loan assignment. If you didn’t the carrier would be getting a bonus of $375,000.
What to do if You’re Uninsurable
If you have severe medical conditions, criminal background or dangerous occupation you may not get approved for life insurance. Unfortunately, there are some cases where no matter which company you apply with you can’t catch a break. As an agency, we have seen how frustrating this was and decided to find alternatives for our uninsured clients. We partnered up with a special risk insurer that can provide large amounts of life insurance on guaranteed acceptance.
This means that regardless of your circumstances you will be approved. The best part of this policy was specifically designed for business loan purposes. The only catch is it is an annual renewable term so premiums will have slight increases every year. The cost of the policy is also higher due to the no questions and no exam approval. Although we use this as the last resort it is still a great option for many.
If you find the policy too costly you may be able to go without a life insurance policy. This is done by getting a letter of denial from the insurance carrier. You can also get an independent agency to provide you with a signed letter stating that you’re uninsurable. If the loan underwriter sees that you did your best to get a policy and have some proof they may approve the loan without a policy.
Wrap Up
Getting an SBA loan is one of the best ways to expand your business enterprise. Especially with the recent expansion of the SBA loan program, many businesses are applying. As an applicant, you know that life insurance is one of the prerequisites your lender will require. This is as we learned is due to the fact that SBA requires businesses tied to an individual or small group to use life insurance as collateral. Most businesses happen to be set up this way in the first place.
Your life insurance policy must meet certain criteria. It should cover both accidental and health-related deaths. The amount and the length of the life insurance plan should be the same as the loan you’re applying for. Also, the policy should not have any waiting periods before paying out beside the standard two year contestability period for fraud, suicide, or an act of violence/terrorism.
We also learned that you can go for either a term or permanent life insurance policy. With the term being the more popular of the two due to cost and simplicity. The best option for someone looking to get life insurance for an SBA loan is a no exam. It’s very quick and you can skip the nurse visit. Of course, you can simply use an existing policy if you have a large amount that won’t affect your beneficiaries.
The process of applying involves 7 steps that your life insurance agent will take care of.
Work with Us
If you’re ready to move forward, we have veteran life insurance agents who specialize with SBA Loans on standby. As an independent online life insurance agency, we work with over 30 top-rated companies to get you the best rate. Some of our carriers include Prudential, Protective, Banner Life, AIG, and many others. Not only will we help you in the entire process from beginning to the end we also provide lifetime support. Life insurance for SBA loans is not a typical purchase, so let us help.
If you have additional questions about life insurance for SBA loans, feel free to visit our quotes page in the right sidebar or call us at 888-492-1967
