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How To Get Life Insurance For An SBA Loan

A few months or years into your first or second job, you realize you realize that you want more independence. So you start brainstorming, and you come up with a business idea, but now there is a problem. You do not have enough capital, and so you need to apply for a Small Business Administration (SBA) loan.

Many people find themselves in such a situation, and many have benefited from SBA business loans. If you are thinking of getting an SBA loan, the first thing you need to do is to get life insurance. This is because it is mandatory to have life insurance so that you can get approved for an SBA loan.

Why life insurance is necessary when applying for an SBA loan

Contrary to popular belief, the SBA is actually not a loan provider, but it does collaborate with banks and other financial institutions to make sure that people have access to loans for small businesses. The SBA makes sure that the loans are guaranteed and provided with competitive and flexible terms. The fact that the SBA guarantees business loans means that it backs a significant percentage of the loan.

Lenders benefit from the SBA backing because it means the loans because the risks are significantly reduced, especially if the borrower fails to pay. The SBA also tries to make sure that it reduces the risks on its side by doing some due diligence to determine the likelihood of success. This includes requiring information on how the business will be managed, whether individually or jointly. 

Most small businesses are operated individually and are also known as sole proprietorships. This means that the performance of the business is purely based on the performance of the sole proprietor. This means that the health of the business owner plays a key role in the success of the business. This is why it is important for the business owner to have life insurance coverage.

Life insurance for SBA allows the lenders to lower the risks involved in lending, and so this requirement is a measure that allows the lenders to protect themselves. A life insurance coverage is supposed to provide enough funds to offset the loan in case the borrower meets his/her demise before clearing the loan repayments.

Borrowers have to secure a life insurance coverage whose insured sum can cover the business loan. The borrower must, therefore, highlight the lender as a recipient of part of the life insurance payout or the entire payout. 

Understanding collateral assignment

If you are thinking about applying for a life insurance coverage, then it is important to understand the concept of the collateral assignment. The latter refers to a concept or process through which the borrower picks out the lender as the main beneficiary of his/her life insurance payout but not the only beneficiary. Collateral assignment, therefore, allows the borrower to include the lender in the beneficiary list while also allowing other individuals to benefit.

In case the borrower decides not to include collateral assignment, the lender might still receive the total payout of the remaining amount that the borrower may not have cleared. However, borrowers should pick out and fill a collateral assignment form from their insurer.

The duration of the life insurance policy

It is best to maintain the life insurance policy during the period of loan repayment. It is always a good idea to consult with your loan provider so that you know how long the loan repayment duration will last. This will also help to determine how long you should maintain the active status of your life insurance coverage.

Failure to keep up with your life insurance coverage premiums, especially before you finish your SBA loan repayment might be a huge inconvenience. This is because the lender may conclude that you have defaulted on the loan and therefore request full payment of the principal balance. The borrower also has the option of retaining the life insurance coverage even if they finish paying their loan. The insurance coverage may still be helpful in the future because your family can benefit financially.

The lender often requires various aspects or guidelines to be met before issuing the loan, as indicated below.

  • The death benefit that is highlighted under the life insurance policy should be covered by the outstanding principal amount of the applied loan. It should also continue to cover the outstanding amount during the remaining loan period.

  • The loan shall only be issued when there is an active life insurance policy on the business owner.

  • The business owner should make sure they fill the collateral assignment document before the loan’s approval.

  • The loan repayment duration should not be longer than the duration of the life insurance policy.

The loan application will likely be denied if any of the above conditions are not satisfied. The loan applicant needs to follow the right steps to make sure the whole process is successful. They must first have the right information, such as the exact loan amount that they require and the time frame during which they expect to have paid back the loan.

The borrower should at least try to secure a life insurance coverage a few months in advance before applying for a loan. This is because it takes some time for insurance companies to activate life insurance coverage. The process from application to having an active life insurance coverage might take 4 to 6 weeks. This is not ideal for anyone that might be in urgent need of a loan.

The application process requires the applicant to go through medical examinations and release of records. The applicant is also required to provide some vital data such as the identities of the beneficiaries and contact information. As noted earlier, the collateral assignment is also a key part of the process. 

Once the underwriting is done, and the life insurance policy is active, the borrower is now tasked with keeping up with regular payments. Fortunately, the parties involved, including the insurance company and the lender try to make it relatively easy for qualified applicants to secure SBA loans.

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