When applying for a loan through the Small Business Administration (SBA), you have to meet some basic qualifications. For example, you need excellent credit, $5 million or less in annual revenue, and a net worth equal to or less than $15 million.
Once you meet the SBA’s requirements for being a small business, you’ll need to meet an additional set of requirements provided by your lender. These requirements often include holding certain types of insurance policies that designate the lender as a payee.
What types of insurance coverage will you need? That depends on your industry and your loan’s collateral. It also depends on the program you’re applying for and most importantly, whether your loan is secured. However, one thing is virtually guaranteed – if you’re the only one running your business and your loan is unsecured, you’ll need a life insurance policy. Your policy must be valid for the duration of your loan with a benefit that matches the amount of your loan.
For some entrepreneurs, a whole life insurance policy makes more sense than term life insurance. However, the details of every policy will differ, so it’s crucial to choose your policy after you know your lender’s requirements.
Are you considered high risk? You can still get life insurance.
Some life insurance companies won’t approve people considered to be ‘high risk.’ High risk people include smokers over 50, people who engage in dangerous activities, and people with health problems. It’s also hard to get life insurance with a felony on your record.
Although getting life insurance through standard insurers is hard, some companies have insurance policies designed for high risk people. For example, Gerber has a policy for people aged 50 to 80 years old. Gerber’s high-risk policies issue benefits from $5,000 to $25,000 with no medical exams required and no questions asked.
Why is life insurance required to get an SBA loan?
A personal life insurance policy would help your loved ones pay off your debt and pay for basic living expenses if you die. Life insurance for SBA loans is similar, but allows your lender to collect the payment to be reimbursed for the cost of your loan. It’s basically life insurance for your business.
Multiple life insurance policies are often a good idea.
Some small business owners benefit from carrying multiple life insurance policies. These businesses buy policies in addition to what’s required by their SBA lender. For instance, a key person insurance policy provides a payout to the business owner when a critically important employee dies. For businesses that would lose a significant amount of revenue after losing an essential employee, key life insurance is non-negotiable.
A buy-sell agreement is another common insurance policy, though mostly optional. Businesses with multiple owners can combine their individual life insurance policies into a buy-sell agreement. Under a buy-sell agreement, all partners determine a price required to buy out a surviving family’s share when a business partner dies. Under this agreement, the life insurance policy pays the buyout price to the surviving family.
Are you surprised that you might need life insurance to get an SBA loan?
While carrying common policies that cover earthquakes, floods, and property damage makes sense, you might be surprised when a lender says you need life insurance. However, it makes sense. Lenders need to do everything possible to ensure they’ll get repaid. Borrowers without collateral to secure the loan will naturally be required to secure their loan in other ways.
Applying for an SBA loan? Avoid common mistakes.
Most lenders will require that you buy a life insurance policy before the loan is finalized. Have a plan for submitting multiple applications to different insurers if you’re considered at risk. Don’t wait until the last minute to look for high risk lenders.
When you do get the required insurance policies, make sure you designate your lender as a conditional recipient of a portion of your policy’s benefits. Don’t name your lender as a beneficiary. Beneficiaries are entitled to the full payout of your death benefits. Your lender doesn’t need to be entitled to the full payout – only the amount that matches the balance of your loan. Designating your lender as a conditional recipient ensures that your beneficiaries get the remainder of benefits after your lender receives their payment.
The process of applying and getting approved for an SBA loan can take a while, so make sure you do things right from the start.
