Perhaps you are in your 50’s or 60’s and have decided to open a business. Or perhaps you have had the business for a while.
Either way you have decided that you want to obtain SBA loan and have found out that you required to get life insurance. If so, this article is for you.
When it comes to starting a business, there’s a lot of different things that you have to take care of to make sure that you’re on solid footing.
However, as an entrepreneur, most of your focus will be on the various day-to-day operations of the business, as well as securing funding for your initial investment.
The Small Business Administration is excellent for getting a loan for your new enterprise, but there is one component many people don’t realize is often a requirement – life insurance.
Yes, if you want to get an SBA loan, you may have to have life insurance.
Even if you currently have a policy in place, you may need to adjust it to satisfy the loan requirements. In this article we will look at everything you need to know about life insurance for SBA loans.
Why Do I Need Life Insurance?
At first, it may seem confusing to have to buy an insurance policy before you get the loan. But here’s the deal…
Life insurance comes into play, because it may be required as a source of collateral for the loan.
Let’s take a look at some of the key things to consider.
Term vs. Whole Life Insurance
Most often it is best to purchase term life life insurance when needed for an SBA loan . The reason for this is because you won’t be paying the loan indefinitely, so there’s no reason to have permanent life insurance that will outlast the terms of the loan.
In fact usually a 10 year term policy is often times all you need. There is no reason to buy 15, 20, or 30 term if 10 years is all that you’ll need the coverage for.
That being said, if you want to keep the insurance afterward, having a term policy for a longer period of time such as 20 or 30 years or even a getting a permanent life insurance policy may be ideal (more on that later).
What If I Need To Get Life Insurance Fast?
Every insurance company has different underwriting requirements. Many require an exam and will want to obtain your medical records. This process can take 4 to 6 weeks on average.
However, there are some life insurance companies such as Sagicor, Forester’s and Nassau Re where you may be able to get approved for coverage without going through a lengthy process to get approved.
They DO NOT require a medical exam up to certain ages and benefit amounts.
For instance, Sagicor will not require a medical exam if you are applying for up to $500,000 of coverage for those between 56 and 65. If you are between 46 and 55 you could get approved for up to $750,000 of coverage without an exam.
Also, you can often you can get approved in a day or 2.
Having said this you do need to be relatively healthy to get approved. If you have uncontrolled diabetes and are having complications from it, or if had a heart attack last month for example, then you won’t be able to get life insurance without doing a medical exam.
Fortunately, no-exam term life insurance plans can usually cover most SBA loans without any problem. Unless you’re borrowing millions of dollars, you shouldn’t have to worry about finding a plan that works for your situation.
On the other hand, if you’re not in a super big hurry, applying for a policy where a medical exam is required may be preferable if you’re in good health.
The reason for this is you could potentially be approved for lower rates. Considering that you’ll be paying back the loan and paying for life insurance, saving a few bucks when you can is never a bad thing.
What is Collateral Assignment?
Another important thing to understand about getting life insurance for an SBA loan is that as you repay the balance, the death benefit remains the same.
So, imagine what could happen if you die before satisfying the loan. The bank would get the full death benefit, even if it’s more than what you owe.
Here’s a simple example. Let’s say the loan amount is for $100,000 and you buy a life insurance policy for $100,000.
Over time you pay the loan down and let’s say you pass away still owing $30,000 on the loan. You wouldn’t want the full $100,000 benefit from the life insurance policy going to the lender right?!
Instead you want the additional $70,000 of coverage to go to somebody of your choosing. Perhaps your spouse or your children.
This is where collateral assignment comes into play. This process allows you to name a family member as the primary beneficiary while still being able to satisfy the requirement of your SBA loan.
The collateral assignment allows for the insurance company to pay the lender first, and any remaining balance goes to your primary beneficiary.
If you are needing life insurance coverage for a an SBA loan make sure you tell me upfront so that I can help you each step of the way to make sure it gets done right.
Can I Cancel My Policy Once the Loan is Repaid?
If you don’t need the coverage anymore then you can certainly cancel the coverage.
However, often people don’t cancel the policy after the loan is paid off, because they decide they need or want the additional coverage for their family.
Think about this for a second…
Consider how well your loved ones will be able to manage without you, particularly if you have a business to run.
Will they be able to cover any outstanding debts? Will they be able to run the company after you’re gone?
Life insurance can help offer financial stability your loved ones so they are left high and dry. Even if the money is used only for funeral expenses, it can make things financially easier for everyone.
Having said that, once again if you don’t need or want the coverage for any reason you can definitely cancel it.
Can You Use Your Existing Life Insurance Policy For an SBA Loan?
Yes you can.
Let’s say you have an existing $500,000 life insurance policy, and let’s also assume you are getting an SBA loan for $100,000 dollars.
You can do a collateral assignment for $100,000. If you were to pass away immediately afterward your lender would receive the $100,000 and your beneficiaries would receive the remaining $400,000.
Here’s The Bottom Line
If you are over the age of 50 and need life insurance because you are getting an SBA loan you have options.
If you need coverage quickly and are relatively healthy you can go with a no exam express issue policy which could be approved in a day or 2.
If you have have time on your side (usually 4-6 weeks) you can go with a policy that requires the full underwriting process. This would give you the opportunity to save the most money.
So do you need speed and need to get a policy in place quickly, or do you have some time? Either way I can help.
Give me a call today. We can discuss what you need, and I can go over your options specific to you in more detail.
Of course, since this is life insurance, the rates you will qualify for and the company that will look at your application most favorably will depend upon your specific lifestyle habits and medical history.
Not to worry. I’ve been doing this for a long time.
After about 10 minutes of talking to you, I’ll be able to let you know your options. Then I can help you get the coverage that you need in place.