If you are in the process of starting a business, or expanding a business, you may be speaking with a lending institution about applying for an SBA loan, and they may be requiring life insurance for the SBA loan approval. SBA loans are designed to give businesses the capital they need in order to get started or to continue to evolve in a positive direction.
Most business owners know raising immediate capital can be one of the hardest aspects of growing a business, but often times it is crucial to the success of a business. Obviously, investing in small businesses is a risky endeavor for lending institutions because of the high rate of failure among new businesses statistically, coupled with mortality risk. One of the ways the SBA has helped to mitigate this risk for lenders, and subsequently lower rates for borrowers, is to require the use of life insurance.
When applying for an SBA loan, you may find it odd when the lender hits the topic of life insurance. A simple explanation of why life insurance is a good idea for lenders will usually clear the air.
For example, you have the idea to start a bakery in your home town. You have saved enough money to get the business off the ground, and business is progressing at a solid pace. In order to fulfill the demand for your product, you decide to apply for an SBA loan. You are approved for your loan of $50,000 and are expected to pay it off over the following years.
Unfortunately, you pass away tragically before the loan has been paid off leaving the lending institution as a collector. In many estates, the business loans can be absolved upon the death of the borrower. This leaves the lender unable to collect on the money owed, which then leads them to raise rates and make it tougher to qualify for loans. This always will have a trickle down effect without the use of safety nets such as life insurance.
It is also important to note, not all family estates are configured to absolve business loans. If this is the case, your family could be on the hook for the amount owed. Without your income, and business, how could they expect to pay this money back. This is definitely worst case scenario, but it does happen to people daily. All estate planning should be handled by an attorney or licensed legal professional.
In this case, if a specific life insurance policy was issued in conjunction with the loan, with the bank as the beneficiary all parties would have been indemnified in the end. Life insurance acts as a buffer for all, it’s a win-win.
As a business owner, I’m sure you are thinking; “How much is this going to cost?”. As long as you can qualify for life insurance, it won’t cost much. The most common type of life insurance which can be used to cover a SBA loan is term life insurance. Term life insurance is especially appropriate in this arrangement because it is designed to cover temporary needs, such as debt.
A licensed insurance agent will be able to work with you in matching the duration of your loan, to the duration of the term life insurance policy. It is also advisable to match the loan amount to face amount of the life insurance policy to avoid any coverage gaps.
The process of assigning the lender as the beneficiary is straightforward, but it is important you communicate this arrangement to the life insurance agent. It is always best practice to double check the beneficiary once the policy is issued.
When applying for any loan, including an SBA loan, it is important to speak with the lender about any discounts on interest rate (or other terms) which may available if you mitigate the risk with life insurance. Many times, it could play a role in the lending agreement since it ensures they will receive the loan amount back without struggle in the event of your passing.
If you are in the process of applying for an SBA loan, or any other loan, we are here to help you obtain the most cost effect life insurance available. We make the shopping process, and application process as simple as possible. You can view quotes from multiple carriers through our online quoter, and even apply online in less than 5 minutes.
Many business owners we speak with already own life insurance personally, but many have never purchased life insurance for the purpose of obtaining an SBA loan. Despite a few small changes, the process is remarkably similar but I would like to cover some of the more common questions we are asked so you can be prepared to obtain your policy.
This is one of the most common questions we are asked regarding life insurance and SBA loans. With the majority of loans you receive such as car and home loans, you are not required to purchase life insurance.
However, SBA loan lenders want the added security you are going to pay the money back. One risk they must hedge against is mortality risk, or the risk you are going to die before paying off the loan. By having you purchase life insurance they can be sure they will receive the money back, which in turn can offer you a lower interested rate.
SBA loans are also tied to a business in which the borrower makes the business tick on a daily basis. If they were to pass away the business may falter, and possibly not pay off loans.
Understanding what type of life insurance you need for your SBA loan is an important part of the process. This can depend on the type of loan, and what is required from the lender of the small business. Most lending agreements will tell you the type of policy you need.
The most common policies associated with SBA loans are term life insurance policies. These can be matched to the loan amount and duration. We do have other options such as return of premium policies which allow you to receive your premiums paid back at the end of the policy.
Setting up a life insurance policy for an SBA loan is not difficult. Searching for a policy is the same as the buying process of any other life insurance policy. Our quoting tool can help you view rates from various companies. When we speak with you about the application process please let us know this is for an SBA loan.
We will design, and setup, the policy so the lender is the beneficiary on the life insurance policy. We will also contact the lender, and obtain you proof of insurance to provide them so you can qualify for your loan.
Being approved for a life insurance policy can be a fairly quick process or can take multiple weeks. If you need a quick turnaround, and need a policy fast, we have no exam options which take much less time than a traditional life insurance policy. One carrier, if you qualify for their product, will actually issue an acceptance within 24 hours.
Being proactive in your application and medical exam will help expedite the process. Please let us know if you are on a tight time schedule.
Finding a life insurance policy for SBA loans and small businesses does not need to be a daunting task. We are here to help you obtain a competitively priced plan, and help you obtain your loan.
For businesses who need extra funds, the SBA’s 7(a) Loan Program is an excellent resource. The SBA is of course the ‘Small Business Administration’ and is one of the very best options for companies looking for capital.
In other words, if you have a small business and you’re looking for funding, this is one place you can turn to get a loan at a better rate than you’d get from commercial lenders. It’s generally considered a risk averse option but there are some important considerations to take into account.
For instance – in order to apply for such a loan there are certain criteria which need to be fulfilled. These including specific life insurance requirements which ensure your debt will be covered should anything happen to you.
In this article, we will look in more detail at what these criteria are, how they affect the cost of your loan and what you can do to make sure your family won’t end up responsible for your outstanding debt.
SBA loans are used by small companies in order to provide working capital, to purchase fixed assets or to expand their business model.
The SBA has recently been working to try and ensure the loans are accessible to as many business owners as possible – and one way they have accomplished this is by introducing the requirement for a life insurance policy.
You may be wondering how adding extra requirements can possibly make a loan more accessible. Doesn’t this just make the process a lot more complicated? How is this a good thing for borrowers?
The answer, of course, is by adding a life insurance policy, borrowers are able to provide better assurance they’ll be able to pay their loans off on time and thus they can improve the rate at which the money is loaned.
Basically, when any company or organization lends money, it does so with the aim of making profit. The borrower takes the loan, they pay it back with interest and at the end, the lender should have more money.
As with any investment though, this involves risk.
When you invest in stocks and shares, there’s the risk the value of the company will fall. When you invest in a person or in a start up the same risk exists – that for whatever reason, the borrower will be worse off and thus unable to pay back the full amount agreed.
Thus lenders have to take this into account when they decide their rates and policies. By requiring life insurance, the SBA is mitigating one of the biggest risks involved in their loans – the risk a borrower might die before fully repaying the amount.
This means the risk is lower when the SBA makes its investments and it means they see a greater profit across the board – and can safely offer a lower interest rate to every business they work with.
This way the life insurance policy is used as collateral – and this is not the only example of life insurance being used that way. Often homeowners will require life insurance policies when taking out mortgages for instance. This is however a consideration to bear in mind when deciding whether to go ahead with an SBA loan.
Life insurance polices are policies pay out when the policy holder dies. If you have life insurance, when you die, all your named beneficiaries (the people you named in the policy) will receive funds.
Typically, these funds can be used to pay for funeral costs and also to allow families to continue with the quality of life to which they have been accustomed. Without life insurance, surviving family members might be forced to move to smaller homes or to seek help looking after children while partners find work.
Life insurance policies can take on many different forms. For general purposes, life insurance policies can be either whole life (meaning they last for the lifetime of the policy holder) or term. A term life insurance policy lasts only for a certain amount of time and once time is up, the policy is guaranteed to pay out (unless it is renewed).
For SBA loans, the type of life insurance will be a term policy. This fixed term will precisely coincide with the length of the loan, so if you are paying back your loan over the course of five years, the insurance will last exactly that long too.
Another type of life insurance policy is known as decreasing term life insurance. This type of insurance decreases in value over time (so you are paying less in, but will get less out). A decreasing term life insurance policy can be used as collateral in such a way the value of the loan exactly matches the remaining amount to pay.
Whole life insurance, meanwhile, merges a life insurance policy with a form of investment. Here, some of the money you pay into your insurance policy will be invested and your policy earns residual revenue inside.
In most cases however, the type of insurance you get for your SBA loan will be straightforward term insurance. Some consider decreasing term insurance to be an antiquated product and for the most part, term life insurance is straight forward, simple and suitable.
So what does all this mean for borrowers? It means you will be paying a lower rate of interest but it also means you have to pay the costs of your life insurance on top – and this might not be immediately clear. It’s important to keep this in mind and to factor it in when calculating whether or not you can afford the loan you need to jump start your company.
One interesting thing to bear in mind is that it is possible to use an existing life insurance policy to pay off your loan. This is called ‘collateral assignment’ and you should speak with your agent about making this possible.
Normally the insurance will be built into the loan itself and you will be given the overall costs for both together. This is fine as long as you don’t want to use your existing policy, mainly because the rates are normally very affordable and competitive.
You also need to think about protecting your family however.
It’s important your insurance be set up in such a way it doesn’t end up entirely going to debts – so at least a fair portion of your life insurance can be used to protect your loved ones. Note that outstanding debts, though, might be transferred to family members anyway – so if you don’t cover the full amount of the loan, your family may become responsible for settling the outstanding balance.
These are all things to discuss with your agent and your financial advisor. While these loans are normally considered to be risk averse, you need to think of every contingency to ensure it is not left to your family to help pay off your debts at a time when they should be mourning.