Life Insurance for SBA Loans [Expert Guide]

Life Insurance for SBA Loans
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    If you’re trying to find out how to get life insurance to meet an SBA loan requirement–you’ve come to the right place.

    We’re going to walk you through all your options. Are you in a rush to get coverage? Is your lender asking you for a specific life insurance effective date? We’ll show you how you can get covered in a little as 2 days!

    Just know that we’ve helped many other entrepreneurs like you. It’s an incredible feeling when you finally make your dream of owning your own business come true.

    So let’s get started and find out how you can get covered with your pending SBA loan.

    Life insurance for SBA loans is a simple purchase and can be quite affordable. The key is using an experienced life insurance agent who can guide your through the process

    I’m In a Rush – Can I Get Coverage Quickly?

    Are you in a hurry and want your life insurance policy as quickly as possible? You’re not alone. Many of our clients are pressed for time and the clock is ticking.

    The quickest way to secure a life insurance policy for your SBA loan is to use a no exam option. With no medical exam life insurance, you can get your policy approved in 24-48 hours. You can get started with No Exam quotes hereFor everyone else, we need to explain the information and steps you need to take to get your SBA loan.

    Related: Best No Medical Exam Life Insurance Companies

    Life Insurance Requirements for SBA Loans

    It would be awesome if banks handed out SBA loans like lollypops. Banks need to protect themselves from financial risk. One layer of protection they use is with life insurance.

    Your lender will often require you to purchase a life insurance policy to protect them and your family. The life insurance policy that you buy for your SBA loan will need to be for the entire amount of your SBA loan.

    When life or disability insurance is advised, the Lender may accept a COLLATERAL ASSIGNMENT of an existing or new decreasing term or universal life insurance policy. The LENDER SHOULD NOT BE NAMED AS A BENEFICIARY. The SBA Loan Closing Document for 7(a) loans explains that the lender will inform you what their requirements are and that they shouldn’t be the beneficiary of the policy.

    life insurance quote

    Is Life Insurance Required for SBA Loans?

    It will depend on your lender, but typically – YES.

    Life insurance policies are required by lenders for SBA loans when a business is connected to an individual. So if you’re the one who is bringing in most of the company’s income – a life insurance policy will be required in most cases.

    This is even spelled out in SOP 50 10 5 (B), where it states that the “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.”

    Related: Business Life Insurance

    What is the Application Process for SBA Loans?

    The life insurance application process for SBA loans is pretty typical. There really isn’t any difference compared to the normal life insurance application.

    Here are a couple of helpful details to communicate with your agent:

    • How fast you need your policy
    • Your health

    1. Timing

    The first thing you need to let your agent know is how quickly you need your policy. A good agent will try and save you money, but TIME is sometimes more important.

    As we mentioned earlier, if you’re pressed for time – your agent will be focused on the fastest life insurance companies. These companies offer no medical exam policies that can be approved much faster than traditional policies. No Exam life insurance can cost you more. However, they are often very competitive with medical exam policies.

    If you aren’t in a rush, then a traditional life insurance policy will be less expensive. Traditional life insurance with a medical exam usually take 4-6 weeks to be approved, but could be more depending on underwriting.

    2. Health

    A medical exam life insurance policy is also a good choice if you have any health issues. There’s no point in wasting time with a no medical exam policy when you may get denied due to your health.

    Make sure you’re working with an agent who is asking you questions about your health (this is actually a good thing!)

    At Life Insurance Blog, we ask specific questions that the life insurance companies will want to know before they approve your policy. We use over 60 companies and make our recommendations based on the information you provide us. We know who gives the best deals based on specific health conditions.

    3. Application

    Once all of the fact gathering has been finished, your agent will provide you all your options. You can simply apply with the company and policy that best meets your needs and SBA loan requirements.

    No Medical Exam Life Insurance Application

    A term life insurance no exam application has several steps.

    1. Online application.
    2. E-signatures
    3. Possible phone interview (depending on the carrier)
    4. Underwriting
    5. Approval (speed depends on carrier)
    6. Payment

    Life Insurance Application with a Medical Exam

    You’ll have an extra step if your policy requires a medical exam.

    1. Application.
    2. Signatures
    3. Medical Exam
    4. Ordering of Medical Records
    5. Underwriting
    6. Approval (4-6 Weeks)
    7. Payment

    4. The Process

    Once the application is submitted and the medial exam is completed – you wait for the carrier’s decision.

    To summarize the entire process…

    You’ll apply for your policy. Most of the companies in our network have a simple online application that we help you from start to finish.

    You’ll then get your medical exam scheduled at a time and place of your choice. It’s paid for by the insurance company, so there is no cost involved on your end.

    Once your exam is completed, the carrier will order your medical records and other underwriting requirements. These are things like your motor vehicle record, prescription database details, and your criminal records.

    life insurance tip

    The life insurance underwriter will analyze everything and make a decision on your final rate class. In other words, if you’re approved – they will let you know how much your policy will cost. Once approved, you can pay and sign your delivery requirements. Congrats… Your policy is now inforce!

    5. The Collateral Assignment

    Collateral Assignment. You’re probably thinking, “Great…more fancy insurance talk.”

    Don’t worry. It’s actually pretty basic.

    The collateral assignment is simply a way that the insurance company pays back your lender only what is owed to them. The remaining balance of your life insurance policy death benefit can go to your loved ones.

    Simple Steps for a Collateral Assignment

    Here’s how the collateral assignment breaks down:

    1. You name a beneficiary to your life insurance policy. This is usually your spouse, partner or another family member.
    2. When your policy is put inforce, you initiate the collateral assignment with the lender.
    3. The insurance company will pay the lender 1st if you die. The balance of the remaining death benefit goes to your beneficiary.

    Can I use my old life insurance for SBA loans?

    Possibly. It will depend on your lender.

    Every lender is different. You’ll need to ask your bank if you can use your current policy or if you need to buy a new life insurance policy for your SBA loan.

    Some of the issues that may cause a problem are:

    • Does your current policy have a death benefit to meet the SBA loan?
    • Does your current policy remaining duration cover you long enough?
    • Do you have a plan to provide coverage for your current beneficiaries?

    Avoid these 3 SBA Life Insurance Disasters

    There are several hurdles you need to avoid before you apply:

    1. Picking the Wrong Agent

    Always use an independent life insurance agent. Why?

    Well…it’s simple. Independent agents have access to multiple companies. The more companies they offer you, the more options you have. The more options you have, the better deal you can get. This is also super important when it comes to SPEED.

    At Life Insurance Blog, we’re independent. We don’t work for a life insurance company. We simply use a network of the best life insurance companies in the market. In fact, we use over 60! So if you’re looking for a fast approval or lowest price – we have you covered!

    2. Don’t List Your Lender As The Beneficiary

    Remember, your spouse or loved one needs to be the beneficiary and a collateral assignment needs to be setup for your lender.

    If you die, you only want the lender to receive the remaining balance of your SBA loan – the rest should go to your family.

    Here’s an example: Let’s say you’re required to get a $500,000 life insurance policy for your SBA loan. Fast forward 5 years and you’ve paid off $400,000 – only $100,000 remaining on the loan. Great job paying it off!

    The following day, you get in a horrible accident and die. That’s horrible news, but to make things worse – your lender was the beneficiary. The lender will get all $500,000 of the death benefit instead of the $100,000 balance!

    3. SBA Loan Needs to Match the Term Length & Benefit Amount

    Before you even think of applying: 1) Make sure that you’re not underinsured. 2) Make sure your life insurance policy term length matches the SBA loan period.

    Important: In other words, you need to apply for a life insurance policy that has a death benefit at least equal to the SBA loan amount. It also needs to cover the same timeframe of your loan. If your loan is for 10 years, you need to buy at least a 10-year term life policy.

    Life Insurance for SBA Loans – Summary

    Here are the 6 steps it takes to get life insurance for SBA loans:

    1. SBA loan life insurance requirements: The lender will let you know exactly what is required to meet and satisfy their SBA requirements. Get these details for your agent.
    2. Shop Multiple Companies. In order to get your policy quickly and at the lowest price, you’ll need to shop around. Don’t overpay and don’t waste time trying to do it on your own. You’re going to get frustrated and you won’t have access to the company underwriting guides. At the very least, make sure you’re shopping from the 10 top life insurance companies.
    3. Work with an Expert. Make sure to work with a professional independent life insurance agent. If your agent isn’t asking you questions, they aren’t helping you. Provide them your health history and other important details that will affect your rates such as dangerous hobbies, tobacco use, medications, etc. Your agent can then present you all your options that you can qualify for.
    4. Apply for Life Insurance. Life Insurance Blog has a simple online application. Complete, sign and submit your application for processing. If an exam is required, make sure to schedule it in the morning and get a good night sleep before.
    5. Decision Time. A decision will be made anywhere from a day to several weeks after you apply. If you can qualify, your policy will be approved (Hopefully at the price you were quoted). The final step is to pay for the policy and complete a few signatures.
    6. Final Step: The last step is to draft a Collateral Assignment. Initiate your a collateral assignment with your lender and submit it to the life insurance carrier to process.

    Congratulations…You’ve done it! You have now satisfied your SBA Loan requirements and collateral assignment for the SBA loan. Now all you need to do is focus on being the world’s best entrepreneur!

    We’re here to help if you need it. Have questions about life insurance for SBA loans? We have answers. You can even get started right now by getting instant life insurance quotes here or give us a call. Either way, don’t worry…we’ll get you covered in time.

    Michael Quinn

    Michael Quinn

    Michael is a licensed life insurance agent, expert & owner of Life Insurance Blog. LIB has helped thousands of shoppers understand life insurance and secure affordable coverage.

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