You’re a business owner and the center of responsibility. You’re responsible for your business partners, employees, your investors, and your family and loved ones that are depending on the financial health of your business. As the business owner and chief operator of your business, your untimely death spells disaster for all these groups. Obtaining a life insurance policy can help you prevent a disastrous outcome should you, as a business owner, pass away. Often times, when you took out an SBA (7a) loan to help stimulate your business, they required you to have a life insurance policy. This requirement was put in place to cover the SBA’s risk for investing in your business. They will have lost their investment if you pass away before you repay them, so collateral assignment will be arranged to protect their investment.
Business Owner Coverage
The death benefit on your life insurance policy will be used to both cover your business debt with the SBA and provide for your family. Should you pass away, the SBA is entitled from the collateral assignment to a portion of the benefit.
Acquiring life insurance doesn’t only protect the SBA’s interests and investments. It will also protect your family from the consequences of repaying your loans for you or selling the business at too low of a price when you aren’t around. If you were to die, would you leave your family to complete the loan you took out? Would they be able to complete it without your income? Did you have any of your family’s assets in the collateral when you were taking out these loans? Your business loses value without you. Could your family afford to keep the business running at less value? If they decide to sell the business now that you aren’t running it, could they survive on what it is now worth?
Buy Sell Agreements
If you started your business with a business partner then life insurance also protects their ownership in the business. A buy-sell agreement also works with the death benefit on your life insurance. If you were to die, your business partner has the option to buy your share of the company from your loved ones and family with the policy’s death benefit they took out on the business owner. This scenario keeps your business healthy and surviving under a trusted business partner’s care should the worst happen, in addition to caring for your family. For this reason, buy-sell agreements done with life insurance are often called ‘business wills’.
The process for getting insured for the SBA (7a) loan can take 4-6 weeks, or longer if the underwriting is tricky or your insurance company requires more records than usual. You need to apply to your insurer with medical, driving and criminal records ready. The insurance company will then underwrite your situations and conditions. If you are approved, negotiation collateral is the next step. This process could be a lot to handle and you should know what a good deal looks like for you, your business and your family. Consult us for navigating your life insurance requirements.