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Many folks never get to know that they would need life insurance to acquire an SBA loan, and at this point it may be pretty late to acquire the kind of loan they would want, since it is largely dependent on how much worth of insurance they can afford.
Here is the drill; SBA does not actually fund any of its loans. They work hand in hand with a variety of banks and other bodies of money lenders that have been vetted; who will lend money to your business. The SBA in return guarantees your loan by supporting a portion of your loan if you were to default on payment at any given time. This reduces the risk of the lender when loaning money to you for your business, making it much easier for small businesses administrations to get general funding.
However, the SBA would need to protect their own portion of the loan they would be responsible to pay back. Therefore, they collated some guidelines that would protect themselves with life insurance and under the SBA SOP 50 10 5 (b) Part D, which states that;
- The lender must determine the viability of the business by requiring life insurance, it helps prove if the business is tied to an individual or a set of individuals. And since most persons applying for SBA loans are sole proprietorship/individual entrepreneurs, the viability of the business is therefore tied to that individual who requires to purchase a life insurance to qualify for such loans.
- Your life insurance must match the size and term of the loan. In this case, the amount of collateral that was agreed upon to repay the loan if the individual dies is proportionate to the amount of life insurance. Therefore, to be eligible for a bigger amount of loan, you will need to purchase an equal number of life insurance policies in size and term.
- The lender is required to obtain collateral assignment stating it as assignee, this is acknowledged by the insurer. The lender further ensures that the borrower pays the premium on the policy. Now, giving your lender collateral assignment on your life insurance policy implies that; you are giving them primary access to your life insurance policy. So, when you die, the life insurance policy will pay the entirety of your loan to the lender first, remaining funds are then channeled to other beneficiaries. (Note: Assignee does not mean that your lenders are your primary beneficiaries and should never be named as your primary beneficiaries)
- For instance, you purchased a $700,000 life insurance policy for your $700,000 SBA loan, and you’ve already paid $250,000 of the loan, the SBA will collect $550,000 when you pass on.
- If you have an existing life insurance policy, that matches the needs of the loan, it can be used as well, although this part of the requirement is often vague. It is clear to us that obtaining life insurance is one of the most critical steps in securing your loan.
MORE ABOUT USING AN EXISTING LIFE INSURANCE POLICY
As much as lenders accept existing life insurance policies for SBA loans, it is more advisable to purchase a different one for this purpose to protect the benefits of your initial beneficiaries.
Recall that your lenders would be given priority, using an existing life insurance policy, therefore, lessens the compensation intended for your family after you must have passed on as some of it goes to your lender.
However, purchasing a new life insurance policy for SBA loans allows your beneficiaries full security and assurance of coverage.
REQUIREMENTS FOR LIFE INSURANCE FOR SBA LOANS
Now, let’s talk about what requirements your insurance policy will need to meet to qualify for an SBA loan;
One beautiful part of acquiring life insurance is, you don’t need to take an exam, and neither do you require the assistance of an agent. It can be done in easy and few steps. However, its requirement goes beyond the collateral assignment. Below are some factors you life insurance policy would need to satisfy an SBA loan;
1. Policy Must Be In-Force
The SBA requires that you must have an active life insurance policy on yourself before your lender funds you. This implies that you must already have a valid life insurance policy before you are eligible to receive any funds, as you cannot ask for funding before your life insurance becomes active.
2. You Must Have Enough Coverage in Term and Amount
The compensation on death in your policy must cover the amount of the loan you wish to apply for and continue to cover it for as long as the loan lasts. For this reason, it is advisable to purchase term life insurance for SBA loans that are equivalent in term and that covers the amount of your loan.
For instance, if you wish to borrow $700,000 over the next five years, you could buy a $700,000 term life insurance policy that would last for at least five years. This gives the lender a sense of assurance that it will cover the entire loan amount.
3. Collateral assignment must be documented
As much as having a proper collateral assignment is essential, it must be properly documented and approved by the Home office of the insurer. Since the collateral assignment represents a crucial aspect of getting your loan approved; without documentation, your lender has no guarantee that your beneficiaries would pay up the loan when you die, and hence your loan will not be approved.
TYPES OF LIFE INSURANCE TO CONSIDER
The basic types of life insurance one can consider when applying for an SBA loan are; the Term Life Insurance and the Whole Life Insurance.
- Term Life Insurance: Is a type of insurance that lasts for a certain number of years varying from 10, 15, 10, 25 or 30 year term. It allows for a high amount of coverage for an affordable monthly premium. It is considered as most appropriate by folks because it can be scheduled to last as much as an SBA loan would. However, if the insured dies at the speculated time, the remaining funds after repaying the loan is distributed to its beneficiaries accordingly. But if the insured exceeds the speculated time, the insurance can be renewed annually, canceled or converted into a whole life insurance policy.
- Whole Life Insurance: Is a type of insurance that offers a permanent plan and lasts for as long as the insured is alive. Its coverage often lasts until age 100 or 121 with a fixed rate of premium with cash value accumulation.
After the loan is repaid, the insurance policy continues to be invoked for as long as the insured is alive. However, if the individual passes on, the loan is fully repaid and the rest funds distributed amongst his beneficiaries.
There are no lenders who would not request life insurance as a basic requirement for an SBA loan. To get fast and easy approval, make sure you first purchase a life insurance policy that works with your loan term and assures repayment.
You may also like: How Do SBA Loans Work (and What You Need to Get One)
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