When you apply for a Small Business Administration (SBA) loan, you may not initially consider needing life insurance.

While buying a life insurance policy sounds overwhelming, it doesn’t have to stall your loan application process.

life insurance for sba loan

Here’s everything you need to know about life insurance for SBA loan applications, why you need it, and how to get coverage.

Do You Need Life Insurance for an SBA Loan?

The SBA does not 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:

  • Have life insurance if the viability of your business is tied to you as an individual.
  • Have life insurance that matches the size and term of your SBA loan
  • Get collateral assignment with the lender as assignee, and have this assignment acknowledged by the Home Office of the Insurer.

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.

THE SIMPLY INSURANCE WAY

No Exam Life Insurance made easy.

Agents not required.

Get quotes and sign up online without talking to an agent. But, we are here if you need us. 

Unbiased, expert advice.

Get unbiased insurance education from licensed experts and also avoid dodgy sales calls.

Coverage in minutes.

You can get no exam life insurance coverage within minutes of getting your quotes and applying.

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.

In-Force Policy

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.

INSURANCE WHERE YOU LIVE

Life insurance by state.

Can I Use a Policy I Already Own?

Although your lender will accept an existing life insurance policy for your SBA loan, you should purchase a different one.

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.

In some cases, however, your lender may require disability insurance. You may also want to buy key person life insurance.

small business administration loan

Disability 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.

THE SIMPLY INSURANCE WAY

No Exam Life Insurance made easy.

Agents not required.

Get quotes and sign up online without talking to an agent. But, we are here if you need us. 

Unbiased, expert advice.

Get unbiased insurance education from licensed experts and also avoid dodgy sales calls.

Coverage in minutes.

You can get no exam life insurance coverage within minutes of getting your quotes and applying.

Taking Action

You won't find a lender who doesn't require life insurance for an SBA loan.

To get approved fast, prepare early by purchasing a life insurance policy that works with your loan terms to ensure repayment.

If you need this policy fast then just click here to get started.


Sa El

About the author

Sa El is the Co-Founder of Simply Insurance and a licensed Insurance Agent with over 11 years of experience in the industry.  He specializes in Life & Health Insurance and is certified in Long Term Care Insurance in the state of Georgia. He is also an Official Member of the Forbes Finance Council, a licensed real estate agent in the state of Georgia (License #382602), an entrepreneur, insurance educator, and freelance writer.


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