Life Insurance for SBA Loans [The Ultimate Guide] 2024

Life Insurance for SBA Loans: The Ultimate Guide 2024

Ready to transform your business ideas into reality? Like most entrepreneurs, you likely need an SBA loan to help fund your new enterprise. But you might be surprised to learn that you first need a life insurance policy to get approved.

Obtaining the right life insurance for your SBA loan sounds like a headache. But with clear guidance from a qualified life insurance agent, it doesn’t have to be.

Our Life Insurance for SBA Loans: [The Ultimate Guide] will help explain the SBA loan life insurance requirements, how the collateral assignment process works and how to streamline the process to purchase the life insurance quickly so you can secure the funds needed to successfully launch your new business.

Why do I need life insurance for an SBA Loan?

I know what you’re thinking: what does life insurance have to do with my SBA loan? First, it’s important to note that the U.S. Small Business Administration (SBA) does not make or fund its own loans. Instead, the SBA works directly with carefully vetted lenders and approved financial institutions that lend money to small business owners like you.

The SBA minimizes risk for the lender by agreeing to back a portion of your loan. This reassurance makes it easier for lenders to issue funds that help entrepreneurs like you get their businesses off the ground. But the SBA seeks protection, too. That’s where your required life insurance policy comes into play. Life insurance guarantees the loan will be paid in full in the event of borrower untimely death.  

Do all business loans require life insurance?

In general, most lending institutions won’t approve an SBA loan without life insurance.  To assess its need, the lender uses established guidelines to “determine if the viability of the business is tied to an individual or individuals.” In other words, the lender evaluates whether the health and sustainability of the business is based on your involvement.

As the small business owner, your participation is vital to its success. Therefore, it’s almost certain a lender will require you to purchase life insurance before approving your SBA loan. Because your involvement is key to business outcomes, the SBA uses the term “key man insurance” to describe the act of taking out coverage on yourself for businesses purposes. We’ll revisit the idea of “key man insurance” later in this guide.

 Here are some common business types that typically require life insurance:

• Single-member limited liability companies (LLC)
• Single-shareholder C or S corporations
• Sole proprietorships
• Certain partnerships (e.g. law or physician practices)

SBA loan life insurance requirements summary

Here are the 5 SBA loan life insurance policy requirements:

• Policy needs to cover the outstanding SBA loan balance
• Policy needs to cover the duration or term of the SBA loan
• Policy must be collateral assigned to the lender as the beneficiary for the outstanding SBA loan balance
• Keep the premiums payments current on the policy and be able to show proof the policy is inforce at anytime throughout the loan period

What does “collateral assignment” mean?

By now it should be clear that life insurance is a must when securing an SBA loan. But in most cases, simply purchasing the policy isn’t enough. There are several categories of small business loans available through SBA’s 7(a) loan program, and each carries its own set of requirements. One common requirement you’ll likely encounter is collateral assignment.

What does that mean exactly? In a nutshell, when a collateral assignment is made on a life insurance policy, the lender is entitled to collect the proceeds of the policy if the borrower dies before it is repaid in full. The lender collects the amount that is still owed on the loan, and the borrower’s beneficiaries then receive the remaining death benefit or policy cash value.

How do I know if collateral assignment is required?

Determination of collateral assignment is based on several factors. For example, the SBA requires lenders to collateralize standard loans over $350,000 “to the maximum extent possible.” And for most small business owners in that category, it means purchasing a life insurance policy.

Other circumstances require collateral assignment even if you apply for a loan of lesser amount.  For example, the ability to meet the minimum acceptable credit score, how much other collateral you can provide to secure the loan, and whether the SBA will guarantee the loan, are all factored into the equation. Another common piece of criteria is the extent to which the business depends on your active participation, which we outlined earlier in this guide. The bottom line is that most small business owners need to purchase life insurance.

Collateral assignment: how it works

Here are the 5 key terms and conditions of collateral assignment on a life insurance policy:

• Borrower must be the owner of the policy
• Lender is the designated assignee
• Borrower is the designated lendee
• Lender can collect up to the amount required to repay the loan
• Collateral assignment terminates after the loan is paid in full

Listing the beneficiary on the insurance application

When it comes to listing a beneficiary on the life insurance application for the SBA loan requirement most applicants will name their spouse or a family member. Even though the purpose of the policy is to cover the outstanding SBA loan, for life insurance and SBA loan purposes the lender can’t be listed as the beneficiary on the initial application.

This is where the collateral assignment form comes into play. Once the life insurance policy is in force, the insured and the lender complete the collateral assignment form and insured sends it back to the insurance company. This way if the insured were to pass away the lender will receive the remaining balance left on the SBA loan and the beneficiaries would receive the remaining death benefit amount.

Does the amount of life insurance have to match the loan amount?

Yes. The required life insurance policy you purchase must be proportionate to the amount and term of the SBA loan you secure. For example, if you get a $400,000 loan with a 10-year term, you will need to purchase a $400,000+ life insurance policy with a term of 10 years or more.

Additionally, when collateral assignment is required, the amount and type of collateral available to repay the loan can be taken into consideration when determining the appropriate amount of life insurance. But any way you spin it, coverage must match the size of the SBA loan.

Can I use my existing life insurance policy to secure an SBA loan?

Already have life insurance? If so, you might be wondering if you can simply use your existing policy to help secure an SBA loan. Simply put, it’s not advisable. The SBA technically accepts some in-force life insurance policies that satisfy the terms of the loan, but it poses risk to your family’s future.

If your original intent when buying life insurance was to provide long-term financial protection for your family, you are better off keeping that policy separate from your business affairs. Why? Collateral assignment would require you to assign the policy to the lender until your SBA loan is paid back in full. It’s safer—and smarter—to get a new life insurance policy altogether.

Will my medical issues prevent me from getting life insurance?

It’s common to worry that medical issues might disqualify you from getting a life insurance policy. You should be relieved to know that some medical conditions have little to no bearing on your ability to secure the coverage you need for an SBA loan.

That said, there are some more serious issues like diabetes or cancer history that can impact the likelihood of qualifying for traditional life insurance. But don’t leave the process to guesswork. The most prudent course of action is to work with a reputable agent who is equipped to assess your situation and find you the best life insurance carrier and rate. A credible agent can vet different companies and find suitable options at no additional cost to you.

I have other investors. Do I still need life insurance on myself?

As mentioned earlier, when you apply for an SBA loan, the lender works to determine the impact of your sole involvement in the company. They do this even if there are other investors in the mix.

Let’s say you are the founder or even an employee whose role is so significant that the health of the company depends on it. In this scenario, you are considered a “key person” or “key man,” and life insurance is necessary to protect the SBA loan. In other words, if a key man passes away or is suddenly unable to manage critical operations, it’s unlikely the business will survive, and the loan is at risk of going unpaid.

How does key man life insurance work?

When your new business includes other investors or constituents, the company usually purchases key man life insurance on your behalf. Additionally, they serve as the policy’s primary beneficiary and also pay the premiums.

Once coverage is secured, the policy funds can be used to reimburse investors or find a replacement should you unexpectedly perish or suffer disability. No, it’s not a feel-good topic, but it’s reasonable for investors to ask, “what happens to my money if you’re suddenly out of the picture and the business crumbles?”

A key man life insurance policy provides investors with reassurance that their money is safe regardless of what happens to the company founder or most essential employee.

Can I get term instead of permanent life insurance for the SBA loan?

The short answer is yes. Most times, a term policy makes the most financial sense and is the most used type of life insurance for an SBA loan because the cost can be up to 20 times less than a permanent policy. However, be mindful that the premiums meet your budget since the policy must remain in force for the duration of the loan. Should you miss or delay a payment, your lender will be notified right away.

And remember— whether you secure a permanent policy or a term policy, the term and amount must match that of your SBA loan.

Rates– Life insurance for SBA Express and Small loans

Let’s take a look at the sample monthly life insurance premiums for the SBA Express loans that have a maximum loan amount up to $350k for SBA Export Express loans maximum loan amount up to $500k.

Age	Male $100k	Female $100k
25	$7	$6
30	$7	$6
35	$7	$7
40	$8	$8
45	$11	$11
50	$14	$12
55	$20	$17
60	$29	$24
65	$43	$33
70	$86	$56
75	$151	$97
80	$252	$198

_{These rates above are for a 10-year level term at the Preferred Plus health class with accelerated underwriting and fully underwritten. Instant-approval term life insurance will typically have higher premiums since there is less underwriting.}

The 10-year term is the most common term for an SBA Loan. The typical SBA loan maximum maturity date is 10 years since most loans are to cover; working capital, inventory or equipment.

The maximum maturity date for an SBA loan for real estate is 25 years.

At these coverage amounts, most will be eligible for the no-exam policy.

Rates- Life insurance for SBA loans premiums (7a) loan program and 504 loan program

Below are the sample monthly rates for a life insurance policy for the SBA loan Standard (7a) and 504 loan program requirement.

Age	$250k	$500k
25	$9	$13
30	$9	$13
35	$9	$13
40	$12	$17
45	$16	$27
50	$23	$40
55	$37	$67
60	$58	$109
65	$100	$187
70	$175	$313
75	$328	$631

_{Rates for a male, D.O.B. 7/1 in excellent health at the Preferred Plus health class from insurers such as: AIG, Banner Life, Symetra Life, Protective Life, Application is no exam accelerated and}, _{or traditional application and underwriting process depending on eligibility. Women traditionally have lower premiums then men for life insurance. No-exam (accelerated underwriting) policies may still available dependent on the applicants age and coverage amount.}

Rates- Life insurance for SBA Microloan program

Below are the sample monthly rates for an instant-issue life insurance policy for the SBA Microloan program requirement.

Age	$25k	$50k
25	$7	$10
30	$6	$9
35	$7	$10
40	$7	$10
45	$8	$12
50	$9	$14
55	$11	$18
60	$68	$134

_{*Rates for a male, D.O.B. 7/1 in excellent health, Preferred Plus health class on a 10 year term. Rates above are from Sproutt and SBLI instant issue and TruStage Simplified Issue instant issue.}

Do I need disability insurance for my SBA loan?

Disability insurance is by far one of the most overlooked—yet critical—types of insurance a small business owner should consider. Also called “paycheck” insurance, disability insurance provides key financial protection you need to pay the bills and keep your business afloat if you become ill or disabled.

Contrary to popular belief, illness trumps accidents as the #1 cause of disability. As a small business owner, the success of your enterprise lies in your ability to show up each day and manage the operation. If you fall ill or suffer another type of debilitating condition, things would go downhill quickly on the business side. Specifically, you might not be able to pay your life insurance premiums, stay current on SBA loan payments, or simply pay the rent.

While the primary focus of SBA requirements is on life insurance for good reason, lenders can also require disability insurance. Either way, it’s advisable to purchase a long-term disability insurance policy with at least a 5-year term period.  This will insulate you and your small business from any likelihood of financial ruin. How? The way it works is that a disability insurance policy with a 5-year term would pay out 60% of your annual income in monthly installments for 5 years.

I need an SBA loan now. How do I get fast coverage?

Racing against the clock to meet the SBA loan application deadline? You’re not alone.  And don’t panic— you have some options available to secure a life insurance policy quickly.

One avenue to consider is purchasing life insurance through a company that offers no-exam policies. No-exam policies are issued through an accelerated underwriting process, meaning a paramedical exam is not required to get life insurance coverage. If you meet the good to average health criteria, these companies can often issue you a life insurance policy in a matter of minutes to several days.

The process is simple and streamlined:

1. You answer a series of specific questions about your health.

2. Company accesses your information from different databases.

3. They assess your responses and background.

4. You receive an answer about coverage.

No medical exam, online application that offers a same-day instant-approval term life insurance policy for SBA loans

There is a now a no-exam, fast, instant-issue, same-day (if approved) term life insurance policy that is ideal for the SBA loan life insurance requirement. The application process is called instant-decision or instant-approval term life insurance. It works by using automated underwriting technology and your application answers to provide an immediate decision. If approved, you can activate a policy in as fast as 12-minutes. This can be a lifesaver for many entrepreneurs that need a term life insurance policy A.S.A.P. to meet the SBA loan requirement so they can get their loan funded.

Buy term life insurance online instantly without speaking to an agent! No medical exam, instant-decision, fast, same-day term life insurance coverage from $25k to $1 million and 10, 15, 20 year term lengths are available to those that qualify. Eligible ages 18-55 years old. If approved, coverage is available in less than 12 minutes with an easy collateral assignment process. Coverage is from a top rated insurer that has been in business for over 100 years and never failed to pay a legitimate claim.

What if I don’t qualify for accelerated underwriting?

If your medical history is more complicated, or you simply prefer a more traditional route, it can take about 2 to 6 weeks for an answer about life insurance coverage. Why the delay? For starters, the underwriting process requires a 30-minute no-cost paramed exam at your home or office. Also, at the discretion of the underwriter, your medical records may be requested from your physician, so you must wait until those are returned and then reviewed before the policy is approved.  

It’s worth noting that policies secured through accelerated or no-exam underwriting typically carry a limit of $1.5 million in coverage or less, depending on the insurance company. For reference, typical SBA loans are usually less than $500,000. If you need more than that, you will have to may need to pursue a fully underwritten policy, a process that can take one month or more to complete. A great life insurance broker will keep you up to date and help facilitate the underwriting process along. They can also contact your loan officer and provide documentation on the life insurance application.

Recap: SBA loan life insurance requirements

Let’s recap. As you can see, securing an SBA loan requires more than just submitting an application. You will also likely need to:

1. Obtain the right life insurance from the start.

2. Get approved.

3. Pay the premiums for the life of the SBA loan to place the policy inforce.

4. Confirm the life insurance policy is collaterally assigned to lender.

Failure to follow protocol may result in unfavorable outcomes for you and your business. Most notably, your SBA loan may be denied. If the loan was approved already, you could put yourself at risk of defaulting and accelerating payment on the balance.

Don’t wait. Get the expert guidance you need right now. Use an experienced agent

An experienced life insurance broker will do the homework and shop the market from the top carriers up front to make sure you receive the best rate whether you’re in excellent shape or have some health issues. They will also keep you and your loan officer updated throughout the underwriting process. Additionally, a great broker will assist you with the final step which is the collateral assignment form.

Sure, understanding the life insurance requirements for an SBA loan is a lot to digest. But you don’t have to navigate the process alone. To meet your business goals and needs quickly, the best decision you can make is contacting a trusted industry expert.

SBA Loan Resources:

• SBA Loan Resource Page (SBA.gov)
• Term Life Insurance Calculator (PolicyMutual.com)