If you’re applying for a SBA loan, your lending institution may require you to purchase a life insurance policy before approving and funding your loan. This is also known as collateralization.
Investopedia defines collateralization as; “The act where a borrower pledges an asset as a recourse to the lender in the event that the borrower defaults on the initial loan.”
By collateralizing your SBA loan, the lender is ensuring that they will receive a full reimbursement for their loan in the event that you pass away prior to the loan being repaid.
In this quick guide, we’ll explain the 4 simple steps to purchasing life insurance for a SBA loan. We’ve also explained why some life insurance companies are better for funding a SBA loan than others.
Quick Article Guide:
4 Easy Steps to Purchase Life Insurance for a SBA Loan
We’ve simplified the process for purchasing life insurance for a SBA loan or business loan into 4 easy steps that are outlined below:
1. Determine the amount of coverage needed to secure your SBA loan.
When purchasing life insurance to collateralize a SBA loan, the amount of coverage you purchase must match your initial SBA loan balance. As an example, if your SBA loan is $300,000, make sure you purchase a term life insurance policy for $300,000. Purchasing a life insurance policy for less than the amount of your SBA loan could leave your family or business partners with a sizeable debt if you pass away before the loan is repaid.
2. Determine the amount of time needed to pay off your loan.
When you apply for a term policy, select a term or period of coverage that matches or exceeds the term of your loan. If you repay the loan faster than expected, you can always cancel your term policy with no penalties. Most of our clients purchase 10 year term policies for their SBA loan, however; 15, 20, 25, and 30 year terms may be available. Remember, the shorter the term, the lower the cost.
3. Shop the market and apply for your policy.
Working with an independent agency can save you a considerable amount of money on your life insurance policy. Every life insurance company has their own pricing and guidelines for coverage. With a few questions about your health and lifestyle, we’ll be able to compare rates and risk guidelines from more than 60 top-rated life insurers, matching your needs with the best company available. Our service is free, and we’ve helped hundreds of business owners just like you. You can reach us toll free at: 855-902-6494, or you can request a free instant quote online by clicking here.
4. We’ll help you complete your application properly and take care of the rest.
When your application is approved, your licensed agent will contact you, and send a ledger with your approved options. At this time, you can adjust your coverage, if needed. Once you settle on your policy amount and term, your policy will be active as soon as you make your first payment. We’ll also assist with a collateral assignment if needed, ensuring that your business debts and your loved ones are each taken care of if something were to happen to you.
If you’re on the run, or if you need your life insurance in a hurry, we can help. We offer affordable term life insurance options that do not require a medical exam, and often times, these policies can be approved in as little as 1 to 7 days.
What is A Collateral Assignment?
With term life insurance, the amount of coverage you purchase stays the same for the entire life of your policy. However, as you pay down your loan, you’ll owe your bank less money than the amount of your life insurance policy. To avoid over-insuring your business loan, life insurance companies utilize a “collateral assignment.”
A collateral assignment allows the insured to assign the amount of coverage that exceeds their remaining loan balance to a family member or business partner. This strategy greatly reduces the “red tape” and the amount of business financial information you’ll need to provide to the insurance company. It also provides greater protection to both your business and family.
To speed up the amount of time required for an approval, the insurance company will ask you to name a family member as your beneficiary when you apply for coverage. Once your policy is approved, we’ll help you complete a “collateral assignment” form to list your lender as a beneficiary for the amount of the outstanding loan. This amount will automatically decrease as the loan is paid down, allocating a larger percentage of your policy’s death benefit to a family member until the loan is completely repaid.
The insurance companies and your SBA lender require a collateral assignment because it guarantees their loan balance is reimbursed in the event of your death. Your family also benefits because they’ll receive the balance of your life insurance proceeds if you unexpectedly pass away.
Real World Example of A Client We’ve Helped
Last year we worked with 72 year old male named Robert who needed life insurance for his business loan. Robert, or Bob as he prefers to be called, reached out to us last fall to inquire about purchasing life insurance for a SBA loan. Bob’s question: “Can a young man with my level of experience still qualify for life insurance?”
Bob has had a lifelong goal of starting a small pub in Pennsylvania, but his bank would only allow him to take out a $300,000 SBA loan if he could secure a $300,000 10-year term life insurance policy. The bank wanted to make sure that Bob was healthy enough to see his business take off…and that they’d likely be repaid.
While speaking with Bob, he told us that he had almost given up on his lifelong dream. Before he found our agency online, his local agent had told him that he could no longer qualify for term life insurance. While this may be common with companies that primarily sell home and auto insurance, it is not the case with most companies that specialize in life insurance. After shopping rates and options from more than 60 companies, we decided to apply with an A+ rated life insurance carrier that specializes with approving healthy male applicants in their 70’s.
Bob was approved for life insurance within a few weeks, and we’re happy to say that his pub is off to a good start.
Following are the actual rates Bob qualified for. This insurer is one of the top ten insurance companies in the industry, they are A+ (Superior) rated by AM Best, and they have been in business since 1907. In addition to the 10 year term policy, they also offered Bob a policy with fixed rates to age 90, 95, or 100. Bob is 72 years young and aside from a blood pressure medication and a few extra pounds, he’s in very good health. However, if Bob had called us 10 years ago, his rates would be less than half of the cost displayed below.
Bob’s Actual Rates for $100,000 of Life Insurance Coverage to Age 90 or Later
Level Rates Until Age 82 Level Rates Until Age 90 Level Rates Until Age 95 Level Rates Until Age 100
$324.02/Month $614.90/Month $704.80/Month $757.35/Month
*Displayed monthly rates from an A+ rated life insurer and are provided for illustrative purposes only. These rates are accurate as of 03/01/2017
When we called Bob with his approved rates, he was ecstatic! His local “home and auto” insurance agent had almost convinced him that new life insurance policies were not available to men beyond age 65. We’re so glad he called us… Bob is finally fulfilling his lifelong dream of serving craft beers and his family’s favorite recipes.
Why Is It Important to Work with an Independent Agent?
Unfortunately, when purchasing life insurance for a SBA Loan or other Business Loan, most life insurance companies will limit the amount of life insurance that you can qualify for to 50-70% of the loan balance. This can create a serious deficit if the business owner dies before the loan is repaid.
Thankfully, some of the life insurance companies that we represent will offer their applicant’s a policy that covers the full amount of their loan. This is why it is very important to work with an independent agent that represents multiple companies before applying for coverage.
In addition, some life insurance companies can require 6-8 weeks to approve a life insurance policy, while others may be able to approve your policy in less than a week. If you’re up against a deadline and you need your policy in a hurry, applying for a no-exam life insurance policy may be your best option for a speedy approval.
Give us a call today, and we will help you too! We are an employee-owned life insurance agency that is nationally licensed, and we’ve helped thousands of people with their life insurance needs. We provide our clients with “one-stop shopping” by comparing options from more than 60 top-rated life insurance companies to help you save you time and money. We can be reached toll-free at: 855-902-6494, or you can request a free quote online below to shop dozens of companies in less than a minute.