Getting life insurance for your SBA loan is essential if you want to get through the funding process smoothly.
And here's the thing:
Nobody want's the funding of their SBA loan to be held up because of life insurance when there are a ton of other things that could get in the way.
This post is going to cover the average cost of life insurance for SBA loan applications, why you need an insurance policy for coverage, and how to get immediate quotes for an SBA loan life insurance policy with no exam.
How Much Does Life Insurance For An SBA Loan Cost?
The average cost of life insurance for an SBA is $50 per month with an exam and around $65 per month with no exam. However, you don't really have to take my word for it, you can use our free life insurance quote tool below to check out some instant quotes and apply for coverage in less than 5 minutes.
Do You Need Life Insurance For An SBA Loan?
Yes, you do need life insurance for an SBA loan; this is because the SBA doesn't lend directly to you. Instead, you borrow from a bank, and the SBA helps you pay back a portion of your loan after you have received it.
That means the SBA wants to protect their investment, and they require you to have liquid assets to guarantee repayment of your loan. This protection lowers the risk for the SBA and the bank.
According to the SBA SOP 50 10 5(B), you must:
When you designate your lender as the assignee for a collateral assignment, that does not make them the beneficiary of your policy.
You should never name your lender as your beneficiary. If you do and then die, no matter how much of your loan you have already paid, your lender collects the entire death benefit. As the collateral assignment, your lender only receives what you still owe on your loan.
For example, if you have a $500,000 life insurance policy for your $500,000 SBA loan, and you’ve already paid $250,000 of the loan, the SBA will collect $250,000 upon your death. The other $250,000 would go to your beneficiaries.
Requirements For SBA Life Insurance
Life insurance requirements for SBA loans go beyond the collateral assignment. Most of these requirements must also be in effect before you apply for or fund the loan, so make sure you consider them early.
The SBA dictates that you must have an in-force life insurance policy before your lender funds your loan. That means that you must already have a valid and active life insurance policy before you receive your funds. You can’t adjust the policy’s effective date, and you can’t ask for funding before your life insurance becomes active.
Coverage Term and Amount
You should always purchase term life insurance for SBA loans that match the term and coverage amount of your loan. If you borrow $250,000 over ten years, you should buy a $250,000 term life insurance policy that lasts at least ten years. By purchasing a life insurance policy that aligns with your loan terms, you assure your lender that it will cover the entire loan amount.
Document Collateral Assignment
With a collateral assignment, you must document it and have the Home Office of the Insurer approve it.
The documentation must match the loan terms, and collateral assignment represents one of the most crucial aspects of getting loan approval. Without a documented collateral assignment, your lender has no guarantee that your beneficiaries will repay your loan if you die.
With an SBA loan, this collateral assignment represents your commitment to repaying the loan under any circumstances. That's why, without documentation, the lender will not grant their approval.
How Long Should You Keep Your Policy?
You must keep your life insurance policy for at least as long as your loan’s term. If you terminate it early, your lender may find you in default on your loan and ask you to pay the full loan amount back.
However, you don’t need to cancel your policy when you pay off your loan. As long as you don’t designate your lender as your beneficiary, your policy becomes regular life insurance coverage once you pay back your loan. That means that if you die within your life insurance term, your beneficiaries get that coverage.
If you already have another policy, there's no harm in having two, especially if you've already paid for them. While you may have bought this policy to cover your loan, the policy itself has no connection to your lender once you have repaid that loan.
LIFE INSURANCE WHERE YOU LIVE
Term Life insurance by state.
With a Life Insurance policy you can take care of your family the right way.
Should anything happen to you, you'll want to leave your loved ones a financial nest egg for their wellbeing. Click on your state to find out more.
Can I Use A Policy I Already Own?
Yes, you can use a policy you already own, however, when you use your existing policy as collateral, that means that whatever coverage you intended for your family lessens, as some of it goes to your lender.
Using a policy you already own means your family risks debt in the event of your death. Purchasing a new term life insurance policy for SBA loans allows your beneficiaries’ security while keeping to the terms of your loan.
Are Any Other Types Of Insurance Required?
Often, SBA loans only require you to purchase life insurance.
But, it doesn't always stop there: In some cases, your lender may require disability insurance.
You may also want to buy key person life insurance.
Disability insurance offers you further protection not only for your loan but for your business.
When you purchase long-term disability insurance, you guarantee that, even if you become ill, injured, or disabled and can no longer work, you continue to receive 60% or more of your paycheck.
Disability insurance prevents you from using your savings to pay back your loan and covers all your living expenses without income. If you can’t keep your business running due to disability, disability insurance gives you a safety net.
Key Person Life Insurance
Lenders don’t typically require key person life insurance, but having it can give you more security and stability. If your company has investors, key person life insurance protects them.
If you die, your investors get a death benefit that would allow them to cover your SBA loan without risk. They could also use the payout to find someone to replace you and keep the business running.
Either way, key person life insurance means that your loan gets paid off, and your investors feel secure when they put money into your business.