Do SBA Loans Require Life Insurance?

Small Business Administration Loans, also known as SBA loans are used for a variety of business purposes. These purposes could include.

  • Start-up costs: Helping your business get off the ground.
  • Expansion: Sometimes businesses need a little extra boost to grow their operations.
  • Equipment purchases: In order to scale, sometimes new and improved equipment needs to be purchased. An SBA loan could help with that.
  • Working Capital: Daily operational expenses could add up. Sometimes, an SBA loan could provide the necessary funding for these expenses.
  • Inventory: For businesses that require inventory, an SBA loan could help with managing and purchasing stock.

These are only a couple of examples, as there could be many more ways in which an SBA loan could be utilized for business purposes.

However, one question that pops up frequently when discussing getting an SBA loan is whether or not life insurance is required. Here’s the answer.

Due to the fact that there are many different types of SBA loans, we have to take a look at the requirements for each individual loan in order to determine whether or not life insurance is necessary. Let’s go over each one.

SBA 7a Loan

When you get an SBA 7(a) small business loan, you usually need to get a life insurance policy for the full amount of the loan. This protects the lender in case you pass away before repaying the loan.

However, there can be exceptions to this full coverage requirement:

  • If your business has multiple owners who are active in running the company, the life insurance assignment can be divided between them proportionally. For example, if there are two equal owners and a $1 million loan, each owner could be responsible for a $500,000 policy.
  • In some cases, the lender may waive the life insurance requirement if they determine the business could continue operating and making loan payments even if an owner died. But this is decided on a case-by-case basis.

So while a life insurance policy for the full loan amount is standard, there is some flexibility based on your specific situation as a borrower and the policies of the lender you work with. Connecting with your lender early on can help sort out the details of life insurance and get exceptions approved if warranted.

SBA 504 Loan

Life insurance is usually not required for you to get an SBA 504 loan. This type of loan covers purchasing major fixed assets like real estate or equipment.

The reason life insurance is often waived is because the property or equipment being purchased serves as collateral for the loan. So, if the borrower dies, the lender can seize those assets to recover their investment.

For example, if you use a $1 million SBA 504 loan to finance a new factory, the factory itself acts as collateral. The lender could sell it to pay off the outstanding loan balance if needed. This makes life insurance less critical.

However, if the collateral assets do not fully cover the value of the 504 loan, the lender may require life insurance to fill that gap in coverage.

What Are The Guidelines If You Do Need a Life Insurance Policy For an SBA Loan?

There are a couple of different guidelines you need to take into consideration when thinking about whether or not you need life insurance for an SBA loan.

Viability Of The Business

First off, you need to figure out if the viability of the business is tied to an individual person. If the business could easily continue without that person, then life insurance is likely not required.

However, if the individual has a specialized skill set or is a crucial part of the business operation and their death would significantly impact the company’s ability to operate, then life insurance may be necessary.

Coverage Needs To Equal The Loan Balance

When you go to take out an SBA loan and need a life insurance policy to go along with it, your coverage needs to at least equal the loan balance. This ensures that if something were to happen, the lender would have enough money to pay off the outstanding loan balance.

If your current coverage does not meet this requirement, you can either increase your coverage or take out a separate life insurance policy specifically for the SBA loan.

The Policy Must Name The Lender As The Primary Beneficiary

So the lender could get their money back if something were to happen, the policy must be written to name the lender as the primary beneficiary. Once the loan is paid off, your original beneficiaries can be reinstated as the primary beneficiaries. It’s important that you weigh your options as you may want to get a secondary policy that’s separate from your primary as a way to protect your family.

The Best Type Of Policy Is a Term Policy For an SBA Loan

When you take out an SBA loan, it’s a fixed term. So it’s only right that you get a term life insurance policy that matches the length of the loan. This type of policy provides coverage for a specific period, typically 10-30 years, and is often more affordable than other types of policies.

What Are The Benefits Of Using Life Insurance For an SBA Loan?

There are various ways that life insurance can benefit you. These ways include.

Increased Chances You Will Get Accepted For The Loan

By having a life insurance policy that meets the required coverage amount and names the lender as the primary beneficiary, you increase your chances of being accepted for an SBA loan. Lenders want to know their money will be protected in case something happens to you.

Peace Of Mind For You And Your Loved Ones

The reason you’re running your business to begin with is to provide for your family. By getting life insurance, you ensure that they won’t be financially responsible for the loan if something happens to you. This gives both you and your loved ones peace of mind.

Faster Approval Process

One crucial aspect of business is speed. You need to be able to move fast in order to compete and grow. By having a life insurance policy in place, you can speed up the approval process for your SBA loan, as it shows that you have taken the necessary steps to mitigate risk.

The Importance Of Choosing The Right Policy

It’s very important to choose the right policy when looking to get an SBA loan. Here’s why.

You Want To Make Sure You’re In Line With The Lender Requirements

Not all lenders are the same. Because of this, you need to make sure you choose a policy that meets the lender’s specific requirements. Otherwise, your application may be rejected.

You Want To Get The Best Value For Your Money

When shopping for life insurance, it’s important to consider not just the coverage amount but also the premium and any additional benefits or riders included in the policy. The right policy will give you what you need but won’t hurt your pockets in the process.

If You Do Things Wrong, It could Delay Your Loan

Getting your life insurance policy right is really important when you apply for a small business loan. Making mistakes on your policy details could hold up your loan from being approved. Delays like this can hurt your business if you need the money quickly.

How You Can Make Sure You Get The Right Life Insurance Policy For An SBA Loan

The name of our website, “Life Insurance For SBA Loans” says it all.

We specialize in providing life insurance policies for businesses who are looking to secure an SBA loan.

Our process is a quick and easy one, giving you the opportunity to get approved fast and get your loan process moving.

Here are the benefits of working alongside us.

  • We have complete expertise in SBA Requirements. We’ll take all the guessing away and provide you with an insurance policy that meets the exact requirements of your SBA loan.
  • Once you enter your information on our homepage, we usually get back within 24 hours with the right life insurance policy for you.
  • We work with over 60 insurance companies to make sure you get the best rates and coverage options available.
  • We don’t push just any policy because it benefits us. Our goal is to provide you with the best policy for your specific needs.
  • We provide direct access to our SBA life insurance experts throughout the process.

If you’re interested in getting started with us, simply fill out the form on our homepage and we will be back to you as soon as possible.

If you happen to have any questions and want to contact us, click here now!