A lot of Americans have used the SBA loans to power their dreams of starting and growing their businesses. This has also been a supportive channel for business owners to recover from disasters. Once you take out an SBA Loan, most lenders will require you to lock in a Life insurance policy to protect that loan. As such, this might slow down the process of acquiring your SBA loan since most times this is not revealed to the borrower until later in the process. Securing an SBA Loan can be an extensive process and even frustrating for anyone but first…
What is SBA Loan Life Insurance and Why Do You Need it?
On average, SBA Loan amounts can be about $100,000 but on the higher end, this amount can shoot up to $1 million. This is a large risk for lenders because if a borrower defaults such an amount or passes away before paying the loan, the lending institutions are at the losing end. On that account, SBA Loan borrowers are required to buy a life insurance policy to act as collateral for the loan. This way, if the borrower dies before finishing the loan payments, the life insurance policy pays for the remainder of the loan balance.
When taking out a life insurance policy, the death benefit amount should match the amount of your loan. It is important to note that the lending institution is not the beneficiary of your life insurance policy. Just like other policies, you will need to name a beneficiary such that if you die before the loan completion, part of the policy proceeds are used to complete those payments while the rest goes to your named beneficiary.
So the reason you will need a life insurance policy for your SBA loan is that they offer collateral assignments. To simplify, the collateral assignment dictates that the lender is the assignee of your policy but still allows a beneficiary who is eligible for the remainder of the proceeds after the loan is complete.
Requirements of Your SBA Loan Life Insurance
Before the SBA can fund your loan, you will need to have an in-force life insurance policy. But also, there are a few requirements for your SBA loan life insurance you should be aware of:
The coverage amount should match your SBA loan amount. This assures your lender that the borrowed amount will be paid in full even in the event of your death. For example, if you borrow a loan amount of $100,000 then your life insurance coverage amount should be equal to that, never lower. Find affordable life insurance such as a term life policy that won’t require you to pay extra for investments rather than the death benefit amount.
Just like the coverage amount, the term of your policy should also coincide with that of your loan. For instance, if your loan term is 10 years, then take out a life insurance policy with the same term period. A 10-year term life policy with a coverage amount of $100,000 would be ideal since the coverage amount and period match that of your loan.
As mentioned before, your lender is not your primary beneficiary but rather your policy assignee. This is documented in the collateral assignment which guarantees the lender full payment of your loan from the policy’s proceeds. So if you are applying for an SBA Loan, documenting a collateral assignment is proof of your commitment to completing the loan payment even under unfortunate circumstances. This documentation, therefore, will get your loan approved.
Tips for Buying Life Insurance for Your SBA Loan in 2023
If You Have an Existing Policy…
Perhaps you already own a life insurance policy and want to know if you can use it as collateral for your SBA loan. The simple answer is yes, but there is a blindside to that. Initially, you likely took out the life insurance policy to protect your loved ones from unforeseen circumstances in the future. Which means the policy is meant to provide financial security to your family. So if you use that policy as collateral for your loan, then it takes away that financial cushion you had set up for your family for the future.
Your loan will be paid in case of your death, but your family will be left struggling financially. This means that using your existing life insurance policy might not be a good idea.
Also, you can use your existing life insurance policy as collateral for your SBA loan, but only if the death benefit amount matches the loan amount, if lower, or if it is a term life policy that will mature earlier than your SBA loan, then you might be forced to take out a new policy. And here are a few tips to follow when buying a new life insurance policy for your SBA loan in 2023.
Buy Term Life Insurance
For starters, term life insurance is affordable when compared to other types of life insurance policies. If you are buying a policy that will strictly work as collateral for your loan, then it is only logical to lock in a product that is not only affordable but also temporary. You don’t need a policy that offers lifetime coverage if your loan term contract extends only to 15 years. You get to choose the exact term length that matches your loan term. In addition, unlike other permanent or whole life insurance policies where premiums change throughout the life of the policy, term life allows you to pay the same premium rates throughout the life of the policy.
Choose a Return on Premium Plan
This is sometimes recommended if your loan has either a 20 or 30-year term. Just as the name suggests the policy allows you to get back your premiums at the end of the term period. However, this does not apply to term lengths shorter than 20 years. You will also pay higher premiums compared to the traditional term life insurance policies, but if you like the idea of getting your policy investments returned to you, then you could consider this type of policy.
Choose No Exam Policies
No exam policies are easy to qualify for when compared to other underwritten policies. They are almost instant, so you won’t spend a lot of time scheduling a medical exam. However, you will be required to fill out a medical questionnaire or form when applying for the policy. While a no-exam policy is affordable, the benefit amount might be limited. Usually, this amount can be limited to $1 million but on the brighter side, you can take out more than one no-exam policy for your SBA loan collateral.
Work With a Life Insurance Agent
Hiring a life insurance agent or broker means that you are working with a professional experienced with life insurance for SBA loans. They are conversant with different reliable life insurance policy providers and can help you choose a customized policy based on your needs. Your Life Insurance Agent will work tirelessly for you to ensure that you have the best SBA loan policy regardless of your budget, health, and other considerations. They will save you time, handling all the paperwork and help you document a collateral assignment after your policy is approved.