Collateral assignments are an important part of the life insurance for SBA loan process.
Here’s how the collateral assignment process works:
1. You apply for a life insurance policy and name your beneficiary (your spouse, children, whomever). Just as you normally would.
2. After the policy goes in force, a collateral assignment form from the life insurance company will be sent for you to complete.
3. You get the collateral assignment form signed (some companies require a notarized signature).
4. It take a few days to a few weeks for the life insurance company to acknowledge the assignment (we accelerate the process and know what companies do this quickly)
To clarify, a collateral assignment allows the life insurance company to pay your SBA lender only what they are owed and the rest goes to your beneficiary. As you pay down the loan, the amount of coverage will be more than you need and a collateral assignment form makes sure the lender is only paid what is needed.
If you named the lender as the beneficiary, the lender would receive the entire death benefit even though you’ve paid down the balance and if you did that, the life insurance company wouldn’t issue you the amount of coverage needed – they’ll typically only issue 80% of the loan amount. So it’s imperative that you use a collateral assignment.
Also, be careful with the life insurance company you choose. Not all life insurance companies have collateral assignments. We know which companies do and which companies don’t so you’re not wasting your time applying with a company who will ultimately not be able to satisfy the SBA’s requirement.
We’ve had a lot of business owners spend the time to purchase a life insurance policy only to ultimately not be able to collaterally assign the policy to the bank. Working with an agency experienced in life insurance for SBA loans is critical.
Once we secure a policy for you, our work doesn’t stop. It’s now time to get your collateral assignment notarized and recorded by your life insurance company’s legal department. We take care of this for you and help to expedite it. We know the faster you get this collateral assignment completed, the fast you get your money.
As you can tell, a life insurance agent who specializes in helping those applying for SBA loans will make the process a lot easier for you. We know the ins and outs and will communicate with your lender on time frame to keep everyone in the loop.