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Life Insurance for SBA Loans: What You Need to Know

• March 8, 2024

When you’re applying for alternative financing like an SBA loan, you may need a life insurance policy before your loan can close. Many small business owners are surprised when this requirement comes up, and it can potentially delay your loan application if you’re not ready for it, but it’s an important part of the SBA lending process.

Explore why you’ll need life insurance for SBA loans, what you’ll need to do to meet the requirement, and more.

Why do lenders require life insurance for SBA loans?

Your lender may require you to have life insurance before closing on your loan because it protects everyone involved if you (or a business partner) pass away.

While this is a circumstance that no one wants to imagine, it’s a reality in small business lending. Many small businesses are owned and operated by one owner or partnership. If the sole owner or a business partner passes away, it may mean that the business will no longer be in operation.

Life insurance for SBA loans and other loans not only protects your lender’s interest, it protects your family from taking on your outstanding business loan. Instead, the life insurance policy will pay off the loan.

When do you need life insurance for an SBA loan?

Every small business loan is different, so there’s no blanket answer for when life insurance will be required for your loan. Here are some general guidelines regarding life insurance for SBA loans to help you get a better sense of this requirement:

• An SBA 7(a) loan typically requires life insurance for the full loan amount. However, in certain cases, the life insurance requirement may be reduced or waived if you’ve pledged significant collateral or have a succession plan in place to continue operations.
• For an SBA 504 loan , life insurance is typically only required if your collateral doesn’t fully cover the loan. In some SBA 504 loan deals, the property or equipment you’re purchasing with the loan is enough.

Should you use an existing life insurance policy or take out a new one?

If you already have a life insurance policy (and your insurer allows it), you can assign part of your policy as collateral coverage. You could also take out a new policy that includes your lender as an assignee on the policy.

With a term life insurance policy , your lender may require that the term of the policy matches the term of the loan to ensure full coverage throughout the life of the loan.

If your business has multiple owners who are active in its operations, then the assignment can be split evenly. For example, if two active owners apply for a $1 million small business loan, then each owner would only need to assign $500,000 of their individual life insurance policies. If you’re the only one that’s active in the business’s operations, then you’ll need to assign the entire $1 million to your lender.

If your business can continue to run even if you (or your business partner) pass away, then the life insurance requirement may be waived. This can only be done at the SBA’s or your lender’s discretion.

How to keep your loan process on track when life insurance is required

When you’re applying for a small business loan, ask your lender if life insurance is required as soon as you get started with the process. If it is, ask for the specifics, such as the amount that will need to be assigned. You should also:

• Determine whether you’ll use an assignment from an existing policy or take out a new one. Get either process started right away with an insurer of your choice.
• Reach out to your insurance provider to make sure assigning an existing policy (if you have one) is possible based on information from your lender’s closing attorney.

Setting up a new life insurance policy can take some time, so you should start it early in the application process. Keep in mind that your insurer may require a doctor’s appointment, which can take time to complete (and if multiple owners need appointments, this can take even longer), so give yourself as much time as possible.

If you’ve never applied for a life insurance policy, reach out to your local insurance broker or ask for a referral from other business owners in your network.

Whether it’s a new or existing policy, work with your insurance provider to complete a collateral-assignment agreement before the loan closing.

Life insurance for SBA loans: Extra protection for your lender and your family

The life insurance requirement for SBA loans and other financing options gives you, your lender, and your family an extra layer of financial protection and peace of mind. When you apply for an SBA loan with Pursuit, you’ll have full transparency on what’s required to get to the closing table.

Our expert lending team will answer your questions and keep you updated on what’s next throughout the application process and beyond.  Ready to take the next step? Reach out to us to learn more about our small business loan options available to small businesses in New York , New Jersey , Pennsylvania , and Connecticut .

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SBA Loans: Insurance Requirements and Considerations

Reading Time: 9 minutes

When underwriting and servicing SBA loans, it is important for lenders and CDCs to ensure appropriate insurance coverages are in place to protect the collateral. The SBA does require some types of insurance coverages to be in place on all loans. However, it is the responsibility of lenders and CDCs to carefully consider whether other types of insurance coverage should be in place to help minimize risks and increase chances of recovery on all SBA loans.

Hazard Insurance

As a condition for the loan, the SBA requires borrowers to maintain hazard insurance on all pledged collateral. If the borrower’s business is located in a state that requires additional coverage, such as wind, hail, or earthquake, the borrower must provide a separate policy. 13 CFR § 120.160 ; SOP 50 10 5(K).

Lenders and CDCs are required to ensure that all collateral with a recoverable value is adequately insured in order to protect the ability to recover on the SBA loan. The hazard insurance coverage requirements should be set out in the loan authorization and should not be terminated or reduced, unless the insured assets have been sold or have significantly depreciated. If a borrower allows the insurance coverage to lapse, lenders and CDCs can force-place insurance, if it is consistent with prudent lending practices. Lenders and CDCs who continue insurance coverage can treat the cost of insurance as a recoverable expense. SOP 50 57 2 ; SOP 50 55.

The borrower should name the SBA or the lender/CDC as the loss payee on their hazard insurance policy. As a general rule, the proceeds should not be released unless supporting documentation has been submitted, which verifies that the insured collateral has been properly repaired or replaced, and that no construction or repair related liens have been filed against the property. This is particularly important for insurance checks over $10,000. In the event the borrower does not have appropriate supporting documentation, the lender or CDC must control and monitor the release of insurance proceeds. The lender or CDC can release the insurance proceeds pursuant to an escrow agreement approved by legal counsel, or otherwise allow the borrower to open a federally insured joint savings or custodial account with the lender/CDC and make progress payments. SOP 50 57 2 ; SOP 50 55 .

Real Estate Insurance

If the SBA loan is secured by real estate, lenders and CDCs should request proof of real estate insurance. The real estate insurance policy must:

(a)  Have coverage in the amount of the full replacement cost; (b)  If full replacement cost is not available, the coverage must be for the maximum insurable value; (c)  Contain a “mortgagee clause” in favor of the lender/CDC and provide that any action or failure to act by the mortgagor or owner of the insured property will not invalidate the interest of the lender/CDC/SBA; and (d)  Provide at least 10 days prior written notice to lender/CDC of policy cancellation.

SOP 50 10 5(K).

Personal Property Insurance

  Likewise, if the SBA loan is secured by personal property, lenders and CDCs should request proof of personal property insurance. The personal property insurance policy must:

(a)  Have coverage in the amount of the full replacement cost; (b)  If full replacement cost is not available, the coverage must be for in the maximum insurable value; (c)  Contain a “lender’s loss payable clause” (or a substantial equivalent) in favor of the lender/CDC and provide that any action or failure to act by the borrower or owner of the insured personal property will not invalidate the interest of the lender/CDC/SBA. (d)  Provide at least 10 days prior written notice to lender/CDC of policy cancellation.

Life Insurance

For loans that are processed under standard 7(a) loans over $350,000 or 7(a) small loans that do not meet the minimum acceptable credit score, lenders may follow their internal policies for similarly sized non-SBA guaranteed commercial loans when deciding whether life insurance is appropriate. However, if the 7(a) loan is not fully secured by collateral, or if the loan is a 504 loan, the SBA requires life insurance for the principals of sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner’s active participation. Lenders and CDCs may factor in the available collateral when determining the appropriate amount of life insurance required. SOP 50 10 5(K).

If a life insurance policy is required by the loan documents, this requirement should not be modified or terminated unless the reason for requiring the policy no longer exists. Lenders and CDCs should set up an escrow account to ensure that the borrower pays the premiums on the policy. If the premium payments are not made, lenders and CDCs can decide whether to continue coverage based on prudent lending practices and treat the cost as a recoverable expense. SOP 50 57 2 ; SOP 50 55 .

As a general rule, the proceeds from the assignment of a life insurance policy should be applied to the principal balance of a loan, without a subsidy recoupment fee. All or part of the life insurance proceeds should be released if the death of the insured will have no significant impact on the management of the business, and:

(a)  The proceeds are needed for a valid business purpose; (b)  The proceeds are needed to prevent financial hardship; or (c)  Based on the strength of the business, there is no reason to anticipate that the loan will not be repaid in full.

Lenders and CDCs may also decide to place the insurance proceeds in an escrow account for distribution after the lender/CDC has had the opportunity to observe the borrower’s on-going operations and is able to make a prudent decision. SOP 50 57 2 ; SOP 50 55 .

Flood Insurance

The SBA requires all borrowers to obtain flood insurance if any collateral is located in a special flood hazard area. Collateral is in a special flood hazard area if it is located in a Federal Emergency Management Agency designated special hazard area, and the community participates in the National Flood Insurance Program (“NFIP”). It is the responsibility of lenders and CDCs to notify borrowers if flood insurance must be maintained for the life of the loan. The flood insurance policy must be at least equal to the outstanding principal balance of the loan or the maximum limit of coverage available under the National Flood Insurance Act of 1968, whichever is less. The policy must contain a “mortgagee clause/lender’s loss payable clause” (or a substantial equivalent) in favor of the lender/CDC. This clause must provide for at least 10 days prior written notice to the lender/CDC of policy cancellation. 13 CFR § 120.170 ; SOP 50 10 5(K).

Sometimes, personal property collateral is located in a non-collateral building, which is located in a special flood hazard area. In this case, the lender or CDC must require the borrower to obtain flood insurance for the personal property collateral. However, the lender or CDC may waive this requirement if: (a) it uses prudent lending standards to determine that flood insurance is not economically feasible or not available; and (b) it includes a written justification in the loan file that fully explains why flood insurance is not economically feasible or available, and the steps taken to come to this decision. SOP 50 10 5(K).

Whenever a borrower makes a servicing request, lenders and CDCs must review the adequacy of flood insurance and the need for flood insurance. Lenders and CDCs should decline all servicing requests until the borrower obtains proper flood insurance. If, at any time during the life of the loan, collateral is not adequately covered by flood insurance, lenders and CDCs must instruct the borrower to obtain proper flood insurance within 45 calendar days. If the borrower fails to do so within 45 days, lenders and CDCs must purchase flood insurance on the borrower’s behalf and treat the cost as a recoverable expense. In the event a borrower is no longer able to obtain flood insurance because the community dropped out of the NFIP, lenders and CDCs must keep the documentation establishing why the property is no longer covered by flood insurance in the loan file. SOP 50 57 2 ; SOP 50 55 .

Other Types of Insurance to Consider

Lenders and CDCs must carefully consider whether other types of insurance coverage should be in place on each SBA loan. Other types of insurance to consider include:

(a)  Marine insurance; (b)  Malpractice insurance; (c)  Workers’ compensation insurance; (d)  Dram shop insurance; (e)  Liability insurance; (f)  Product liability insurance; and (g)  Any state specific insurance requirements.

Consequences of Failure to Ensure Collateral is Insured

Failure to ensure proper and adequate insurance coverage is in place may lead to a “Repair” on 7(a) loans. A Repair is defined as “an agreement between SBA and a 7(a) lender as to a specific dollar amount to be deducted from the funds SBA pays on the lender’s guaranty in order to fully compensate SBA for an actual or anticipated loss caused by the lender’s actions or omissions.” SOP 50 57 2 .

Lenders and CDCs should use prudent lending standards to ensure that appropriate insurance coverages are in place to minimize risks and ensure maximum recovery on SBA loans. In most cases, several types of insurance coverage will be required on each SBA loan. To avoid any potential issues, it is imperative that lenders and CDCs keep all decisions on insurance requirements in the loan file.

• Brandon C. Meadows, Esquire
• Melissa Murrin, JD Candidate

Continued reading in the series:

• Which Liquidation Actions Require SBA’s Pre-Approval: Part 1 – SBA 7(a) Loan Liquidation
• Which Liquidation Actions Require SBA’s Pre-Approval: Part 2 – SBA 504 Loan Liquidation
• Classifying SBA Loans in Liquidation Status
• How SBA Lenders Ensure Expense Recovery in Loan Liquidation and Litigation
• What Responsibility and Authority do SBA Lenders Have in Servicing and Liquidating Loans?
• Loan Modification and Deferment Requirements for SBA Lenders
• SBA Loan Site Visits: How to Prepare and What to Expect
• SBA Loans: How to Maximize Recovery by Liquidating Real Property
• SBA Loans: How to Maximize Recovery by Liquidating Personal Property
• How to Maximize Recovery on a SBA Loan by Negotiating a Workout Agreement
• Assumption, Assignment and Sale of SBA Loans
• SBA Loans: Offers in Compromise

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ThinkSBA is a Nationwide SBA 504 and 7a Loan Brokerage serving small business and entrepreneurs purchasing owner occupied real estate, acquiring a business or franchise or buying out a partner.

Collateral Assignment of Life Insurance Requirement For SBA 7(a) & 504 Loan Programs

Life insurance is a contract between a policyholder and insurer where the insurer promises to pay the insured’s beneficiary an agreed amount upon their death. The most common application is between heads of household and their dependents.

Life insurance is also leveraged by commercial lenders as a risk mitigation tool for loan applicants of privately held, family owned businesses.

Similarly, the SBA requires that loan applicants obtain a collateral assignment of life insurance in favor of the lender when the business is formed as a sole proprietorship or single member LLC and is otherwise dependent on one owner’s active participation.

Examples of businesses dependent on one owner’s participation include businesses where special training or licenses are required such as doctor’s offices, assisted living facilities, contractors, mechanic shops, etc.

The required face value of the insurance policy for 7(a) loans is established by the lender who takes into consideration the operating businesses industry classification code, loan amount, length of loan term and available collateral.

On the other hand, Certified Development Companies (CDC) which fund the 504 2nd Deed of Trust, also known as the Debenture, must require a collateral assignment of life insurance with a face value equaling the Debenture minus the available collateral’s discounted liquidation value based on the following schedule:

• Commercial real property including buildings: 75% of appraised value
• Residential real property including buildings: 80%. of appraised value
• Land only and Equipment: 50% of appraised value
• Leasehold improvements, Furniture and fixtures: 5%. Of appraised value

Now, pay close attention to these three important points.

• A collateral assignment of Term Life insurance is acceptable to meet the SBA’s requirement. No lender should require Universal or Whole Life insurance which are generally more costly.
• A loan applicant may assign to the lender or CDC an existing policy that meets their underwriting guidelines.
• A lender can waive the requirement to obtain life insurance if a licensed insurer provides written documentation that the loan applicant is unable to obtain life insurance. Some lenders require denial letters from a minimum of two licensed insurers.

As a best practice, I recommend loan applicants discuss the requirement to obtain life insurance with their loan broker or SBA business development officer upon or before the loan is submitted to underwriting or is scheduled to be presented at loan committee.

The length of time it takes to obtain life insurance is between one to six weeks, or more depending on the life insurance company’s pipeline density, underwriting practices and the loan applicant’s age and health status.

About Ryan Smith

Ryan Smith is Principal and Founder of ThinkSBA® , and Creator of The My SBA Loan Pro Podcast . Ryan specializes in assisting business owners and entrepreneurs with obtaining financing to purchase owner occupied real estate, acquire a business or franchise, or buy out a partner. Ryan accomplishes this by leveraging over eighteen years experience inside two of America’s top financial institutions.

Complete Guide to Life Insurance for an SBA Loan

• September 1, 2023

Entrepreneurs, like yourself, might be surprised to learn that the Small Business Association (SBA) does typically require business owners to have life insurance prior to releasing business funding. 

Let’s break down what you need to know about how SBA loans and life insurance coverage are connected. These tips will help you better prepare for getting the cash you need to make your small business dreams come true.  

Do You Need Life Insurance for SBA Loans? 

First, it’s worth noting that the SBA is not a financial institution, so they aren’t actually loaning anyone money . Instead, the SBA connects their vetted entrepreneurs with a robust roster of approved business lenders. 

In turn, the SBA agrees to back a portion of the loan on behalf of the business owner. This support is what often makes the bank willing to loan money, particularly to new business owners . At the same time, the SBA must be sure their investment in your business is protected, too. 

This is the reason for the life insurance requirement. By having life insurance coverage, the SBA is guaranteed the loan will be paid in full in the case of a business owner’s untimely death. 

Factors That Determine If You Need Life Insurance

The lender will usually complete an assessment of the business, including an understanding of how viable the business would be without the main principle. 

Essentially financial institutions ask themselves this: Could your business survive even if you were to pass away? Or are you the heart of the business and, therefore, your death would cause the business to cease operations? 

Bottom line: if the lender determines you are key to the ongoing success of the business then they will ask you to get life coverage (sometimes called “key person insurance”). 

Do All Lenders Make Business Owners Get a Life Insurance Policy? 

Well, not exactly. Often how the small business is structured is what ultimately determines if a lender requires life insurance. 

Below are the four most common business structures that will usually warrant life insurance in order to borrow funds from any lender. 

• Sole proprietorships
• Certain partnerships (e.g. law firms, medical practice)
• Single shareholder S or C corporations
• Single member Limited Liability Companies (LLC)

Here are general guidelines to help you better understand the rules of life insurance for SBA loans. 

• SBA 504 loan : life insurance is needed if your collateral isn’t quite enough to cover the full loan amount. For instance, if your SBA 504 loan is for $100,000 and your collateral is only $70,000 then you’ll need life insurance for sure. If your collateral does cover the loan amount, you may be able to skip the life insurance coverage. 
• SBA 7(a) loan : typically asks for life insurance to equal the full loan amount. In some situations, the life coverage amount may be lowered if you’ve already pledged plenty of collateral. 

Which Life Insurance Coverage Is Acceptable for SBA Loans? 

Now that you have determined you’re gonna need life insurance coverage, let’s explore the five key points your insurance will need to meet. 

4 Common SBA Life Insurance Requirements

• Policy Value : the value of your life insurance policy should meet or exceed the outstanding amount due on the SBA loan. You’ll be expected to maintain this policy amount throughout the loan years. 
• Active Policy Status: your life insurance policy should already be in effect before the loan will be issued. 
• Collateral Assignment: a proper collateral assignment should be documented prior to the loan being issued. 
• Length of Coverage: your life insurance coverage must remain in effect throughout the loan’s repayment time frame. 

Please be aware: should any of these criteria not be met, even if you’re just waiting on the life insurance policy to be approved, your small business loan application will most likely be denied . 

Steps for Getting Life Insurance Coverage

The average turnaround time on life insurance applications is 4 to 6 weeks. However, at Everyday Life Insurance we use advanced technologies to bring that turnaround time down significantly. Using our online life insurance calculator, most customers get an approved policy within just 20 minutes . 

If you know that you’ll need life insurance for your small business loan, it’s time to start shopping. 

How to Get a Life Insurance Policy Online

Typically, getting life insurance for an SBA loan includes finding an insurance agent, making sure the term is longer than the loan’s repayment schedule, applying, releasing records, scheduling a medical exam, and undergoing so many more steps.

With our Ultimate Online Life Insurance Calculator , all you need is 3 minutes to get a policy recommendation and price quote. Use the calculator to answer some simple questions about your needs & circumstances. Our online application process is available 24/7 and ready to provide you with customized coverage. 

Still, you’ll need to make sure your life insurance policy meets the 4 requirements outlined above. That includes ensuring the term is the same (or longer) than the loan’s repayment schedule. 

For example, If you have an SBA loan of $200,000 and you agreed to pay it back in ten years, then you need to  get a 10 year term life policy with a $200,000 death benefit. 

Have questions? Contact our team for fast & friendly support.

How Much Does Life Insurance Typically Cost? 

The cost for life insurance is always unique to the covered insured. Your monthly premiums will be based on your specific insurance needs and your personal information such as medical history. Our plans start as low as $3.65 per month. 

Can’t I Use My Existing Policy for an SBA Loan? 

If your existing life insurance coverage was purchased to protect your family’s finances should you pass away, then it’s advisable to buy separate life insurance for SBA loans. You see, collateral assignment rules for SBA loans will most likely obligate you to assign the benefits to the SBA until your business loan is paid in full. If anything happens to you during that loan period, your life insurance benefits would go to pay the loan off rather than protecting your family’s financial needs. 

How Can I Afford My Loan and Insurance Premiums Too?

Small businesses often operate on a much tighter budget than larger, more established companies. This means it could be difficult for small business owners, like yourself, to pay a life insurance premium on top of a monthly loan payment. 

The SBA understands this dilemma so they often build the cost of the policy into the loan payment. Or you may want to consider making one premium payment annually and take advantage of any pay-in-full discounts the insurer offers. 

What If I’m Not the Only Business Owner? 

In this case, the financial lender might require each individual owner to have their own active life insurance policy. The main question for any lender is whether the business will still be able to make loan payments despite the passing of one or more owners. 

If the business will be unable to continue paying the outstanding loan balance because of one particular employee (or owner), then the bank will often push for a “key person life insurance” policy instead of multiple coverage plans. 

What is Key Person Life Insurance Coverage? 

Small businesses that have investors, shareholders, and multiple owners should consider getting “key person” life insurance coverage. This type of life insurance can pay for a replacement executive or reimburse investors should the “key” employee become disabled or pass away.

How Does Collateral Assignment Work? 

In some cases, you may be required to have a collateral assignment established. For instance, if you are borrowing $350,000 or more then the SBA automatically requires a collateral assignment. Other factors that might come into play are the amount of collateral you put down, your credit score, if the SBA is willing to guarantee the loan, and your level of active participation within the company. 

The basic terms for collateral assignment are usually as follows: 

• The loan borrower must also be the owner of the life insurance plan
• Lender should be listed as designated assignee
• The loan borrower is the designated lendee
• Lender collects up to the total amount still to be repaid on the outstanding loan
• Collateral assignments terminate after the small business loan is paid off

Should You Get Life Insurance? 

Both life insurance and business financing are unique to each business owner’s needs and expectations. Even if your lender does not require you to buy life insurance to secure a loan, you may want to still consider doing so. The same way a traditional life insurance policy is meant to protect your family’s future, life insurance can protect the future of your business as well. Keep in mind, your customers, employees, and business partners are all relying on the future success of your business too.   See what life insurance offers are available to you now, with our online life insurance calculator.

Disclaimer : The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.

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Your Complete Guide to Life Insurance For SBA Loans

Certain links on this page will refer you to products we might recommend. This creates no additional cost to you , and helps provide us an income so we can continue to bring valuable information to your fingertips. For more information on how we're paid, click our link below. Full Disclosure

Need life insurance to meet SBA loan requirements?

Not a problem!

If you’re on a tight deadline and need a policy fast, we can get you covered in  24-48 hours .

We’ll help you get insured, make sure the loan guidelines are satisfied, and help you with your collateral assignment, even if you have already been turned down by another insurance company.

If you have a pending loan through the SBA, we can get you covered, no matter what .

Let’s get started.

Is Life Insurance Required for SBA Loans?

When you apply for a small business loan, you may be required by the Office of Capital Access within the Small Business Administration to have life insurance.

To be specific, here’s what the SBA Loan Closing Document  for 7(a) loans  has to say:

Life insurance and/or disability insurance is not required for all loans, but the Lender should require life or disability insurance where there is a concern over whether the business could survive in the absence of an individual or small group of individuals that provide the management for the small business concern.

While life insurance may not be required for all loans, a vast majority of lenders will uphold the requirement, especially for a single-owner business, not dependent on the company’s tax filing status.

In other words, entrepreneurs who are the main revenue-driving forces behind the business will be required to have life insurance in order to be granted approval for funds from the SBA.

What Requirements Does the Life Insurance Policy Need to Meet?

There are four key requirements for a life insurance policy to satisfy the loan requirements and guidelines:

• Active policy: The life insurance policy must be in force with the primary revenue creator or owner ( often the same ) before the loan can be issued.
• Amount: The death benefit must cover the existing amount of outstanding principal on the loan applied for, and continue to do so in all loan years.
• Duration of coverage: The life insurance policy length must match or exceed the duration of the loan’s repayment term.
• Collateral assignment: A proper collateral assignment must be documented prior to approval.

If any of these requirements are not satisfied, even if you’ve applied for a policy and are waiting for approval, your loan application can and likely will be denied .

Need life insurance right now? If you’re looking to get a policy in place ASAP, we recommend Bestow. While several companies claim to give you an instant decision, Bestow comes through. With a streamlined online application and a same-day decision, you could have the life insurance you need to secure a loan today. Apply now.

How to Use Life Insurance for an SBA Loan

Purchasing life insurance and using it to obtain a small business loan doesn’t have to be complicated.

You can walk through the process, step-by-step, below.

Step 1: Gather Information

The number one issue borrowers encounter is running out of time.

On average, industry-wide, a fully underwritten life insurance policy takes 4-6 weeks from the time you apply to the time the policy is in force and can sometimes take longer.

As soon as you determine that you need a small business loan, you should start shopping for life insurance.

Begin by getting a life insurance quote for the amount of your loan, and make sure that the coverage lasts at least as long as the loan’s repayment term.

For example, if you are requesting an SBA loan of $250,000 and have agreed to pay it back in ten years, you need to shop for a 10-year $250,000 term policy.

Step 2: Choose a Life Insurance Company

One of the main driving factors in choosing a life insurance carrier is cost.

When you compare quotes for a policy that matches your loan amount, you may simply choose to opt for the policy with the lowest rates .

However, if time is a concern and you aren’t keen on waiting a minimum of 4-6 weeks to secure funding for your business endeavors, you may need to look beyond premiums to make your decision.

If you are on a deadline, we have policies like the one from Bestow mentioned above that can be in force in as little as 24 hours. Just note that these policies will cost more per thousand.

If you have a couple of weeks to spare, you can utilize a no exam life insurance policy. which allows you to bypass the medical exam and get approved within a few days or weeks.

With simplified underwriting, you split the difference between the cost of a fully underwritten term policy (least expensive) and a 24-hour or less approval process (most expensive).

Step 3: Apply for Coverage

As mentioned above, a traditional fully underwritten life insurance policy could take 4 to 6 weeks.

The application process encompasses the following steps:

• Application: A standard application consists of contact information, beneficiary information, medical questions and terms of the policy you’re looking to get.
• Medical exam: Once your application is completed, you’ll schedule an appointment with a third party exam company to complete the physical .
• Release of records: At the same time, you’ll grant the life insurance company access to your MVR (motor vehicle record), medical records, criminal records , driving records , and prescription database information.
• Underwriting: With the information above collected, the application and its corresponding documents reach an underwriter. If enough information is available, the underwriter will assess your risk and either approve or decline  your application.
• Approval: If more information is required, an APS (attending physician statement) can be ordered for direct access to your medical files. Upon approval, you’ll be asked to sign an agreement, consenting to the terms of the policy and the premiums.
• Payment: When you sign off on the policy, you’ll be required to pay your first premium. Once payments are up to date and the delivery is complete, your policy is now considered in force, or active.

Step 3: Arrange a Collateral Assignment

This agreement ensures the debt will be repaid no matter what .

With a collateral assignment, your outstanding principal with the SBA becomes the highest priority, with any remainder of the death benefit to be distributed at your discretion.

While collateral assignment usually requires a simple document, understand that not every life insurance company authorizes this type of arrangement.

The document must be notarized and recorded with the life insurance company’s legal department, which could take up to two weeks.

Once again, the entire process from start to finish will take an average of 4 to 6 weeks , assuming there aren’t extra hurdles to jump.

These hurdles might include additional steps of financial verification, more than one request for medical records, or other standard approval requirements.

Frequently Asked Questions About SBA Loan Life Insurance Policies

Still have questions?

The guidelines above should help you to secure life insurance and an SBA loan with ease, but here are a few more frequently asked questions you may need answers to.

I was declined by more than one company already. Do I have any options left?

Quick Answer : Yes. First, we can help you determine whether any other carriers might offer a better solution.

If they don’t, you can opt for a graded policy , which is a simplified issue product from a no exam company with more liberal underwriting requirements.

Just note that the face amounts on these policies are more limited and might not cover the full amount of your loan.

Last, you may be able to obtain coverage from a company who will insure just about anything.

The coverage can be in place in as little as 24 hours. For these providers to approve an offer for SBA loans, life insurance applications must be accompanied by the prospective loan documents.

My loan terms don’t match up with any policy terms. What do I do?

You have to choose a policy that meets or exceeds both the loan amount and duration.

Let’s look at a scenario: If you are applying for a $230,000 loan to be repaid in 7 years, it’s perfectly acceptable to purchase a $250,000 policy with a 10-year term.

In fact, in this instance, it would be much more affordable because of premium breakpoints.

Keep in mind that you could always cancel your policy in year 7 if you no longer need it.

If you were to die with the policy in force, the extra $20,000, plus the benefit remaining after the loan’s principal, will be paid to whatever beneficiary you designate.

What if my company has more than one owner?

Depending on the lender and the loan specifications, you may need a policy on each individual.

Any time there is more than one owner, the lender can make a case for each owner to have coverage in force.

The lender may question how the business would continue to operate if one or more of its key players were to pass away with an outstanding balance.

Could the business proceed to thrive and make good on its payments with the loss of an owner?

If so, you may be facing an exception that warrants a different type of agreement  like key man life insurance

Can I use my current policy to secure an SBA loan?

In many cases, you can use your current life insurance policy to obtain a business loan. However, not all companies and lenders allow it.

If you already have a life insurance policy in place, you can use it to secure funding more often than not.

Usually, the only red tape is that the policy must still meet all the other requirements, including amount, duration, and collateral assignment.

In addition, you’ll need to alter the prioritization of the death benefit to cover the debt before your beneficiaries.

If your beneficiaries would struggle financially with the new arrangement, you should probably consider purchasing a supplemental policy to meet the loan’s requirements.

What if I can’t afford my life insurance premiums and loan payments?

It’s not uncommon for a new business owner to struggle to come up with premium payments out of pocket.

Most of their cash is already going into the business, and having the business make the payment each month can deplete cash flow.

The Small Business Administration understands the situation and can build the cost of the policy into the loan.

If you choose this option, consider making annual payments on the policy to take advantage of additional discounted premiums.

Should I be using a decreasing term product?

With a decreasing term policy, the death benefit goes down in line with the remaining principal. While this might seem like a great idea, it’s usually inefficient.

The truth is, a decreasing term product will cost you more than a regular term policy .

In addition, with a regular term policy, the difference in death benefit and remaining principal goes to whomever you designate.

Note: You should never assign the lender a percentage of the death benefit–it would change every year!

If you have more questions, we’ve got answers.

Start with step one above and get quotes today to see what rates you could be eligible for.

Jason Fisher

Jason Fisher is the founder and CEO of BestLifeRates.org, LLC. and a multi-state licensed life insurance agent who has helped over a million Americans seek out affordable coverage, compare quotes, or get their family and businesses covered.

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BestLifeRates.org, LLC. provides independent information for the purpose of providing consumers insight into obtaining the best life insurance coverage from the best life insurance company they could obtain, subject to underwriting. No mention of an insurance company or its prices is an offer for life insurance, and all users and applicants shall be subject to any and all underwriting requirements by the insurance company in which you apply. We attempt, within reason, to ensure all quotes are up to date, though rates change periodically and are never guaranteed.

Life Insurance for SBA Loan, A Guide to Getting the Right Policy

Establishing a small business can be complicated, especially if you lack the startup capital. As a dedicated entrepreneur, you need to explore as many options as possible in order to get started. Remember that your close friend or relative may not be willing to offer you cash for your business startup. As such, you may find yourself in total darkness since no one is willing to lend you money. During such dark times, you may opt for the Small Business Administration (SBA, which helps small businesses to secure loans either to establish or expand their businesses. The whole procedure starts by securing life insurance for SBA loans.

SBA loans usually amount to tens of thousands of dollars or even more. As such, financial lenders expose themselves to huge risks because of loan defaulters. There is also a possibility of death before the loans are fully repaid. So, both the Government and the lenders see the importance of protecting themselves from unforeseen death, and this is through a life insurance policy.

Why is Life Insurance Required?

If you ask a young person about their take on acquiring life insurance, you will be surprised by the kind of responses you will get. Some of them will demand to know whether or not obtaining life insurance is a compulsory thing. Others will claim that they are too young and healthy, and thus no need for coverage. Surprisingly, others will say they would wish to invest somewhere else where they can enjoy returns while they are alive. The reason why you will get such reactions is that most of them do not know the benefits of obtaining life insurance.

By definition, life insurance is a written contract between the insured and the insurer, whereby the former has to pay agreed monthly premiums while the latter promises to pay a lump sum to whoever is indicated as beneficiary when the insured dies. Outlined below are some of the benefits you can accrue if you obtain life insurance:

Taking care of your loved ones after your death- This means that your family will be dependent on you even after you are gone.

Deals with outstanding debts- If there are loans you hadn’t finished repaying, they will be settled by your life insurance company.

A great way to achieve your long-term goals- This is a long-term investment and can enable you to achieve your future dreams, such as buying your dream home or planning for your retirement. Taking care of your business- Life insurance is not only meant for you and your family, but also for your business. For instance, term life insurance offers protection for a specified period whereby benefits are paid only if you die during the term.

It is a saving tool- Premiums paid each month accumulates over time and one can obtain a loan to finance their business.

Offers your loved ones total peace of mind- It is a great way to keep your family at peace in the event of your death.

Why Life Insurance for an SBA Loan is Vital

Apart from protecting your loved ones from financial hardship in the event of your death, life insurance is a mandatory requirement for an SBA loan. So, when obtaining life insurance, you need to be extremely careful before sealing a deal with an insurance company out there. With term life insurance, you can count on benefits, such as:

• Flexible options
• Affordable coverage
• No startup costs
• A fixed-rate for a specific time period
• Freedom to change or cancel your policy any time

What Collateral is assigned for Life Insurance SBA Loans?

If you have ever tried to apply for a small business loan, you must have heard of the term collateral. When it comes to SBA loans, the lender is assigned collateral, which acts as security for the loan. Life insurance policy is the common type of collateral assignment when taking an SBA loan. The policy acts as an asset that the financial lending institution will have access to in case the assignor dies or defaults to repay the loan. Conditionally, the policy’s holder assigns the lender as the primary beneficiary to cover the remaining loan should anything happen to them before the loan is fully repaid. If the assignor dies or is unable to repay the loan, the remaining amount owed is deducted from the value of the life insurance policy. Once the loan has been repaid fully, the remaining amount of death benefit is transferred to the beneficiaries, such as spouses, relatives or children.

What Type of Coverage is the Best?

When scouting for life insurance for SBA loans, consider looking at term life insurance. Term life insurance is the common type of life insurance usually purchased for SBA loans. The term life offers coverage for a specified number of years. Most of the money lending institutions are for a set number of years, typically between 10 and 30 years. For instance, a ten-year term is enough for insuring an SBA loan because there is great hope that your business will still be existing and the loan will have been cleared by then. And because starting or expanding a business may hold your money tight, a term policy will try to keep monthly premiums as low as possible.

What are the Requirements to Get an SBA loan?

For small business owners, an SBA loan is a great form of business funding. Keep in mind that SBA loans have low rates. As long you meet the minimum requirements, it is an affordable way of financing your business. Due to their nature of flexibility, these loans can be used to purchase real estate, buy equipment, refinance your loan, or even use it to expand your business.

Just because of their favorable terms, SBA loans are highly competitive. The application process for an SBA loan can be complex and time-consuming. In order to speed up the process, you need to understand all the SBA loan requirements before you apply.

One of the requirements is that you must be US-based. Non-US people do not qualify for these loans since they are US government-guaranteed business loans. Secondly, you should demonstrate excellent personal credit, enough collateral, and stable business financials. If you own about 20% or more of the business, then be ready to sign a personal guarantee.

Apart from the above general requirements, there are specific requirements, which vary depending on the type of SBA loan you are looking to obtain. Also, the amount you are acquiring and how you plan to use the funds matter a lot. Outlined below are the top things you need to know so as to be able to submit a successful SBA loan application:

1. Profit-making Business in an Eligible Industry

Apart from being US-based, your business ought to be a profit-making one. Non-profit-making businesses do not qualify for SBA loans. The business should also be within an eligible industry. Listed below are the industries that have been barred from receiving SBA loans:

• Money lending companies businesses involved in political affairs
• Life insurance companies
• Businesses engaged in gambling
• Speculative businesses
• Passive income businesses

Apart from the above SBA eligibility requirements, each lender ought to have its own list of eligible and ineligible industries. So, before proceeding with the application process, make sure you cross-check the list to see if you are eligible.

2. SBA Size Standards

Since SBA is meant for helping small business owners, they have to verify the size of your company before you are awarded the loan. The business must be small. Size of business can be determined in 3 different ways:

• Number of Employees- Depending on the industry your business is based on, a small business can mean something between 100 to 1500 employees.
• Business Revenue- This is also based on the industry. For the business to be termed as small, its revenue should range between $0.75 million and $38.5 million.
• Business Net Worth- Any small business should not exceed a net revenue of $15 million.

Note that SBA keeps on changing what they term as small business. As such, you need to keep in touch with the SBA interactive tool so you can monitor any changes that may occur.

3. Personal Character and Background

Before you can qualify for an SBA loan, you need to submit your background information. These may include your citizenship status, your criminal record, and physical addresses. Remember that most small business owners tend to default in repaying their loans, so that is why lenders have to thoroughly verify personal information.

If someone has a criminal record, they can still qualify for an SBA loan as long as the crime is not a felony. But lenders have to carry out close scrutiny of such applications with criminal injustices. Citizenship status is required because only U.S. citizens and permanent residents qualify for SBA loans.

4. Resumes of Company Management

Lenders need to know more about your business background. They would want to know how experienced you are in the industry. A resume is particularly needed if you want a loan for a business startup. It is, therefore, important to prepare the resume very well as it will determine your eligibility for the SBA loan.

5. Business Plan

Alongside a resume, a business plan is a vital requirement for an SBA loan. Your business plan gives your lender conviction that your decision to invest in a small business is a sound one. Ensure your business plan includes the following:

• A detailed explanation of your product or service
• A brief analysis of your competitors
• Your marketing strategy
• For an existing business, including historical financial statements
• 3-5 years of financial projections
• Use of loan proceeds
• Terms of existing debts

If possible, try to add details as to why your business is unique. Explain why you have hope for the success of your business. In essence, try to convince your prospective lending company that you are worth the investment.

6. Time in Business

Your prospective lender would want to know how long your business has been existing before approving your SBA loan. The good thing about SBA is that they do not have a fixed time in business requirements. As such, the longer your business has existed, the higher the chances of getting your loan approved. For a young business, SBA may require a minimum of two years in business.

7. Personal Credit Report

Your personal credit score is vitally important when it comes to eligibility for SBA loans. The score shows how you have been managing your finances. An excellent personal credit score gives lenders reassurance that you will be trustworthy and repay your loan on time. Before authorizing your lender to see your personal credit report, make sure you first obtain your own copy. If there is an error in the report, follow the right procedures to make the necessary corrections.

8. Business Credit Report

Unless you need a loan to start a new business, your business credit report must be submitted to the lender. Any business that has been around for a long has a business report, which evaluates how the business has been performing. Other vital requirements may include the following:

• Personal and business income tax returns
• Business financial statements
• Business debt schedule
• Bank statements
• Personal guarantee
• Legal documents

Once you have all the SBA loan requirements, you are now ready to fill out your loan application form. You now enter the underwriting process whereby the SBA takes all the requisite information you provided to access whether or not your business qualifies for the loan. As compared to other types of small business loans, SBA loans usually take a little bit longer to process. But if you are looking for a low-cost business loan, an SBA loan is worth the wait.

Where to Get Affordable Life Insurance

When scouting for an affordable SBA loan for life insurance out there, consider using an independent agency that represents multiple insurance companies. Utilize an agency that is not biased at all and has vast experience in this particular field. The agency will not only find low-rate life insurance for SBA loans but will also advise you on the right way to go.

You need to seek help from an independent life insurance agent who represents hundreds of insurance companies within your state. The agent must be knowledgeable about those carriers offering the lowest rates in the market. You should partner with agents that have already developed a strong working relationship with the leading insurance carriers around your area. Such agents are able to negotiate price on your behalf, and this can enable you to save money and time.

Advantages of Using an Independent Life Insurance Agent

There are many reasons why you should opt for an independent life insurance agent other than a company’s agent. Keep in mind that independent agents try to match their products to prospective clients while captive agents match their clients to specific products available. Since you are looking to get the best life insurance policy at the best price, using an independent agent can be highly advantageous. Below are the top benefits of using an independent life insurance agent:

Competitive Advantage

While a captive agent only represents one life insurance company, an independent agent is not restricted to any of the company’s products. As such, an independent agent has access to dozens of products being sold by different insurance companies in the market. A reliable agent will do a thorough comparison until they get a policy that reflects your situation.

Saves You Money

An independent agent is out to find you the most competitive life insurance rate in the market. Remember rates vary from one insurer to another. As such, independent agents use their vast knowledge of the industry to find the most affordable rate and this is going to save you money.

Helps You Get Customized Products

Bear in mind that people have different life insurance needs. For instance, most of entrepreneurs need loans to either start or expand their businesses. Most of the lenders may require life insurance to act as collateral for the loans. If you talk to an experienced independent agent, they can find you a product that best suits your individual needs.

Offers Valuable Guidance

The insurance industry can be complicated to navigate, especially if you are a first-timer. Talking to an independent life insurance agent can help shed some light on the same. This is because they have been in the industry for a long and have thus mastered all the nuances surrounding life insurance.

Where Can You Find An Independent Agent Today?

Regardless of your need to obtain a life insurance policy, you can always speak to a seasoned independent agent at CFAinsure.com. We are that agency that are ready to shop around for top-rated carriers in the market. We are going to save you the hassle of shopping around for an affordable life insurer. Having been around for quite some time, we are well-versed with the market and have a long list of carriers to choose from. You can contact us via our telephone: 212-573-5563, or just fill out our quote request form and one of our representatives will get in touch with you.

About Jason Hill Founder and President | CFA Insurance

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Life Insurance for SBA Loans: 5 Big Mistakes to Avoid & How to Apply

If you have applied for a Small Business Administration (SBA) loan and need life insurance to be approved, the advice below will help.

Life insurance is typically a necessary component of your SBA loan approval. You will want your life insurance policy to do two things:

• Satisfy your SBA loan requirements
• Be issued quickly

Below, we’ll discuss the 5 big mistakes we see people make when applying for life insurance for SBA loans. We’ll also show you how to avoid them.

Table Of Contents

5 big mistakes to avoid with life insurance for sba loans, how much does life insurance for an sba loan cost, how to apply for life insurance for your sba loan.

Here are the 5 big mistakes to avoid in getting life insurance for SBA loans.

Mistake #1: Legal Requirements are Ignored

Don’t ignore the fine print of your life insurance requirements to secure your SBA loan. According to SBA’s  SOP 50 10 5(B) (a lengthy document describing SBA’s loan requirements and process):

In other words, most  lenders will require the borrower to secure life insurance before the issuance of a small business loan can be finalized.

If the individual(s) is directly connected to the livelihood of the business, the lender will necessitate a life insurance purchase.

Most small business loan recipients are undoubtedly tied to the viability of their business . Chances are, in order for you to receive your loan, you will need to provide proof of appropriate life insurance coverage.

Mistake #2: The Collateral Assignment is Neglected

To set up life insurance for an SBA loan the right way, you must understand the collateral assignment.

What is a Collateral Assignment?

A collateral assignment is a designation of an entity (i.e. your lender) as a conditional recipient of some of the death benefit of your life insurance policy.

Concerning SBA loans, the collateral assignment entitles your lender to an amount of the death benefit that would pay off the balance of your loan, should something happen to you.

The remaining death benefit, once the loan has been repaid, would go to your other beneficiaries.

Why are Collateral Assignments Used?

Collateral assignments provide a safety net for the lender, negating some of the risks on their end.

What are the Steps to Set Up a Collateral Assignment?

Specific steps need to be taken to set up a collateral assignment properly:

• Apply for life insurance with an independent life insurance agent (they will access top no physical life insurance companies to find the best policy for your needs).
• List beneficiary for policy (i.e. spouse).
• Complete collateral assignment – a separate document to be signed and notarized.

Note  – a collateral assignment is different than your beneficiary. The collateral assignment allows your lender to receive only the portion of your death benefit that will pay off the loan.

The remaining death benefit goes to your beneficiary.

Do Not Name Your Lender as a Beneficiary

Your lender should only be entitled to the specific loan amount you owe, and not a beneficiary to your entire death benefit.

Let’s consider an example:

You secure a small business loan for $80,000. In the process, you take out a life insurance policy to satisfy the SBA loan requirements. Your life insurance policy’s face amount is $100,000.

You set up a collateral assignment for your lender for the specific amount of your loan. Should something happen to you, the collateral assignment is paid first and your beneficiary receives the balance of your death benefit. 

Bottom line  – collaborate with an expert independent life insurance agent to verify that your collateral assignment is set up properly.

Mistake #3: No Exam Life Insurance is Not Considered

Often, life insurance is needed in a hurry to secure your SBA loan. No exam life insurance (non-med) typically shaves weeks off the application process.

No exam life insurance is life insurance issued without the medical examination of the applicant.

How Do I Buy No Exam Life Insurance?

While each carrier uses its own process, you can expect the following general steps:

• Submit application (usually electronically/over the phone)
• Your interview will include basic questions about your health, medical history, lifestyle, and occupation
• Application decision

Is No Exam Life Insurance More Expensive?

The cost of no exam life insurance is, in many cases, competitive with fully underwritten life insurance.

As an example, here are quotes for a healthy 35-year-old male for a 20-year term no exam policy for $100,000:

• No Exam: $10.41/month
• With Exam: $9.12/month 

With such a small difference in cost, most find it worth it to opt for the no exam policy. Remember, quotes are examples only, and your specific quote may vary.

Why SBA Loan Applicants Choose No Exam Life Insurance

• No exam life insurance can be issued within a day, instead of the weeks that traditional policies take. This means your SBA loan can be finalized much faster.
• Prices are competitive in many instances.
• You get to skip everything involved in the medical exam like nurses, needles, and liquid samples.

Mistake #4: The Policy Face Amount (and Term) is Not Appropriate

Your life insurance policy must correspond with your SBA loan.

SOP 50 10 5(B)  states:

Your required life insurance policy must be for an amount that will pay off your SBA loan. Additionally, the policy must be for a term that lasts as long as your SBA loan term.

In other words, avoid purchasing a policy that’s for too little or for too short of a term length.

Consider this example:

You are in the process of obtaining an SBA loan for $90,000. Your loan repayment plan will last for 20 years. As a requirement for your loan, you purchase a 20-year term, no exam life insurance policy for $100,000.

You complete a collateral assignment for your lender. Should something happen to you, the loan would be paid off and the balance of the death benefit would be paid to your beneficiary. 

Mistake #5: You Don’t Partner with an Independent Life Insurance Agent

Think of an independent agent as someone sitting on the same side of the table as you. They have your best interest at heart because they’re not held captive to a particular life insurance carrier.

Independent agents shop the top-rated carriers to find the best policy at the best price to fit your needs.

There is no one-size-fits-all life insurance policy. You’ll want to partner with someone who can evaluate your needs and find the best carrier and specific policy for you.

For a general idea of cost, evaluate the following quotes.

Quotes are for 10-year term no exam life insurance policies.

Keep in mind, most SBA loans are limited to 10 years, except for real estate acquisition or construction (source: U.S. SBA Loan Fact Sheet ).

10 Year Term Life Insurance Quotes For Male 30 - 39 Years

10 Year Term Life Insurance Quotes For Female 30 - 39 Years

10 Year Term Life Insurance Quotes For Male 40 - 49 Years

10 Year Term Life Insurance Quotes For Female 40 - 49 Years

10 Year Term Life Insurance Quotes For Male 50 - 59 Years

10 Year Term Life Insurance Quotes For Female 50 - 59 Years

Most SBA loans require a life insurance policy. Fortunately, there’s never been a better time to purchase life insurance, especially without a medical exam.

To quickly secure a life insurance policy for your SBA loan, do two things:

• Partner up: Collaborate with an independent agent (that’s us) to find the best policy at the most competitive price.
• Note  – Should you have any questions about life insurance for SBA loans, an expert independent agent will guide you through the process.

To get started, simply fill out our instant no exam quote tool .

About Heidi Mertlich

Heidi is an independent life insurance agent and the founder of No Physical Term Life. She has specialized in helping clients find life insurance with no medical exam required since 2015.

Aswin Patel

No exam life insurance quote to secure SBA loan. Loan amount is $250,000.

Heidi Mertlich

Thank you for getting in touch, Aswin. We are happy to help you secure coverage for an SBA loan. To get started, simply fill out our free quoting tool.

Dedrick Harbor

I have a policy. I am ready to request a collateral assignment. What are the proper steps?

Bennett Bier

You can request a collateral assignment form from the current carrier. Many people reach out to us to add more coverage so their family still has the protection they need as well. You can reach us at 800-611-9622.

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Reducing Key-Person Risk with Life Insurance for SBA Loans

• Lending Tips
• August 26, 2019

It’s a common belief that all U.S. Small Business Administration (SBA) loans require a collateral assignment of life insurance policies for business owners, managers or other key personnel who have significant responsibility for running business operations. Often, the life-insurance death-benefit policy is assigned to a lender as a part of the required SBA loan collateral. Yet while many SBA loans are at least partially secured with these policies, it’s not a requirement for all SBA-backed loans.

Instead, the SBA requires lenders to evaluate how an individual or individuals are tied the business’s viability or to the overall risks associated with the loan. Using the lender’s assessment, any required or recommended loan protections can be put into place, including life-insurance death-benefit assignments.

Prudent Lenders helps guide our partners through every step of the SBA loan process. This article provides an overview of the SBA’s key-person risk considerations, including practical examples where the assignment of life insurance is likely required.

Do you have a question regarding your borrower’s collateral assignment of life insurance or need some additional information? Our team is just a phone call away .

Overview of key-person risk considerations

While the SBA may not explicitly require all SBA-backed loans to include collateral assignment of key-person life insurance, there are certain situations in which it’s required or warranted to mitigate loan risks.

Specifically, if the death of an owner or a key operational member of a business may cause significant risk to the repayment of the business loan, life insurance will likely be required as collateral. Other examples of these scenarios may include:

• When an owner is the principal of a sole proprietorship or single-member LLC; or when a business is primarily dependent on one owner’s active participation
• When the business is owned or managed by people who work in professional fields wherein licenses are required to perform key duties
• When individuals in ownership or management positions have rare and specialized skills, experiences or talents that can’t be taught or transferred to successive owners or managers

Keep in mind that amounts and types of other collateral available to repay a loan (such as real estate and equipment) are also factored into the assessment. In these cases, if the other pledged collateral sufficiently covers the amount of the loan, then life insurance may not be required even for key personnel.

Additional key-person risk assessment

The SBA leaves it up to lenders to perform key-person risks assessments, including evaluations to decide how the loss of a specialized personnel could potentially put a business and its related debt at risk.

One reliable way to acquire necessary information for an educated assessment is to review bylaws, operating agreements or buy-sell agreements. These important documents indicate ways a business has already considered (and likely addressed) key-person risks, which can reduce or eliminate the need for a lender to require life insurance to secure a loan.

When available, these documents may shed light on key considerations, such as:

• Type of business entity
• Number of business owners, who they are and the roles they play in day-to-day operations
• Value of the business
• Anticipated funding of a buyout

Additionally, and when relevant to a business, lenders should consider:

• How shareholder interests are transferred or sold
• How the value of shares is determined for the transfer
• How the transfer of shares will be financed
• Whether or not the successor(s) has the managerial and industry experience to operate the business in the absence of the key person(s)

However, since many small businesses don’t have sufficiently detailed bylaws, operational agreements or buy-sell agreements in place, the collateral assignment of a life insurance policy on a key owner or manager can often provide the risk mitigation a lender needs, or that the SBA may require, to approve a loan.

Contact Prudent Lenders for more information

As a lender service provider , Prudent Lenders partners with financial institutions to expand their loan portfolios and to strengthen their relationships with small business clients. We help lenders and their borrowers successfully navigate the SBA loan process – from application and approval through closing and servicing.

Looking for more information on SBA loan collateral requirements? Don’t hesitate to reach out with any questions – our team is here to help!

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• Life Insurance for SBA Loans, Everything You Need to Know

With the expansion of the SBA loan program, now is one of the best times to act. Whether you’re in the process or not it is important to know that not having a life insurance policy may halt your approval. Many entrepreneurs and business owners start frantically looking for help when learning about this requirement.

For a good reason, that is because it usually pops up towards the end of the SBA loan approval. This becomes a stalemate because the process of getting life insurance can drag out. But not to worry, we are an independent agency that specializes in life insurance for an SBA loan. If you read this blog not only will you know the best policy to get, how to get it overnight and which legal paperwork you’ll need. 

In summary, here’s what you need to know about life insurance and SBA loans:

• Most of the time you will be required to get life insurance to get approved for an SBA loan.
• You can get a traditional term life insurance policy for the length of the loan. The underwriting for this can take 4 to 8 weeks so make sure to do it as soon as possible.
• If you need life insurance fast, you would have to opt for a no medical exam life insurance policy. Depending on the company, approvals can range from 48 hours to a few weeks.
• It’s important to set up a collateral assignment for your loan, although not all companies do this.

SBA Loans require any business tied to an individual or a group to provide life insurance as collateral. Getting a life insurance policy for an SBA Loan can be quite easy. The most popular route is to get a no medical exam policy. No medical exam policy can be approved within 48 hours with an electronic policy delivery. 

Why Does SBA require life insurance?

One of the first things many business owners ask us is why they are required to get life insurance. The reason is that if your loan is not fully secured by assets then SBA wants you to purchase a life policy. A major concern for the administration is that if you were to pass away prematurely the loan would not be paid. This is especially true for sole proprietors, small group or business depends on a few key individuals. Which in most of the cases it is. 

If you’re a larger company with a multitude of assets with a larger board then you may not be required to get a policy. You can also rest assured that this is overall a common practice with other lenders as well. Anytime a bank gives a loan to the enterprise they want to makes sure they will get their money in the event of death. Some choose to use their house, business assets or investments as collateral. This will satisfy the requirement if the value of the collateral is estimated the same or higher than the loan amount. 

Even in the event that you could use your existing assets it is not advised. The reason is the last thing you want is for the bank to be taking away personal property if you die. Because it will have a direct impact on your loved ones. Besides life insurance is not a large monthly expense so is better to secure a policy than risk assets you worked so hard for. 

SBA Loan Requirements

Before you run to buy a policy you need to be informed on making sure you meet the SBA guidelines. The last thing you want to deal with is going through a lengthy application process to learn your loan is denied because of a wrong policy. It is good to know then, that the guideline is pretty straight forward:

The policy must cover all causes of death

Get an all-cause coverage that will cover death in the event of accidental death or illness. For example, an accidental death benefit plan although easy to acquire would not suffice for an SBA Loan. Because if the result of fatality is anything outside of the accident the lender will not be able to collect the death benefit. 

Coverage Amount

The policy must match the amount of the loan. So if you’re SBA loan is for $500,000 then your life insurance plan must be issued for the same amount or higher. Also, we usually recommend our clients to put their family members as beneficiaries. That way when you assign the policy to the lender as collateral they would only be collecting the balance of the loan. So hypothetically speaking if you passed away and only owed 300k out 500k. The lender would get 300k and your family 200k. 

Length of the Policy

The duration of the policy must be equal length to the duration of the SBA loan. If your loan terms are for 20 years, you’d need to have a minimum of a 20-year term policy or longer. You can also buy a permanent life insurance plan that will cover you up to age 121. This is ideal to lock in the rate and use the policy for future loans or for personal reasons. 

No waiting period 

Your life insurance policy should be approved and issued with no waiting period. Some life insurance plans have a 2 to a 3-year waiting period. This means that if you passed away during that time there would be no payout. 

If you follow the bullets mentioned above it will meet the SBA guidelines. However, you won’t have to stress this too much if you’re working with an experienced life insurance agency. A knowledgeable agent will make sure you get the right kind of policy. 

Types of Life Insurance to Consider

Here are a few types of life insurance products to consider for your SBA loan.

• Term Life Insurance

The most popular type of life insurance policy. Term life insurance allows you to get a high amount of coverage for an affordable monthly premium. This type of coverage will provide protection for a certain number of years. Protection will vary from 10, 15, 20,25 or a 30-year term. Because this policy has an expiration date the premiums are much lower. 

As you can see this policy will make a perfect fit for a collateral loan assignment since you can match the length of your loan. You can also cancel life insurance policies at any time, so if you pay off your loan earlier you’re not stuck in a contract. With a term life policy when your policy ends your coverage either expires or renews annually. The annual renewal will be costly since you don’t have that locked in the initial rate. In most circumstances, people simply convert them to permanent plans or get a new term plan altogether. 

If you’re the type of person who doesn’t like the idea of not having anything to show for. You may want to consider a Return of Premium Term. This is the same coverage albeit more expensive but with a great proposition. If you happen to outlive your term, you’d get every single dollar you paid for the premiums back. Think of it as putting money under the mattress while getting free life insurance. 

• Permanent Life Insurance

A type of policy that simply stays in force until the day you die. Permanent plans offer lifetime coverage usually until age 100 or 121 with fixed rates. Many of permanent plans also have some form of cash value accumulation. This can be a great supplement to your retirement income in the future. The cash value can also be used to have your death benefit grow. For example, let’s say you got a policy to cover you for $1 million dollars at age 35. Due to cash value growth, when you’re 70 your death benefit might be $3.5 million dollars. 

All of that without having to pay anything extra into the policy. Most of our clients who get life insurance for SBA loan purposes don’t necessarily go with these types of policies. If you can afford it though, there a lot of reasons to go with a permanent plan. You’ll get to have a policy for life that can be used for your family, estate planning or even business with growing value. 

Best Life Insurance Policy for SBA Loans

When securing a business loan through SBA your objective is to get a fast and affordable life insurance policy. The solution is no medical exam term life insurance. With a no medical exam policy you can skip the examination and long approval times. Typically, no medical exam life insurance can be approved and issued within 48 hours depending on the company. Currently, we have a few companies that may approve you within the same day. The best part is you can also get your life insurance application complete electronically. Once approved the policy will be emailed to you. 

There are two types of policies when it comes to no medical exam, simplified issue and accelerated underwriting. Simplified issue is known as true no exam since regardless of what you answer on the application an exam won’t be required. Simplified issue plans can be secured up to $1 Million Dollars. This is the absolute quickest option having an active policy. 

Accelerated underwriting plans are traditional term plans that will allow you to skip the medical exam in the event that you qualify. Even though not everyone will qualify to skip the exam. For those that do you’ll have a more competitive premium. Accelerated underwriting is also ideal for SBA Loans that are over $1 million. This is because there is a company offering up to $3 Million without an exam. 

The only downfall with no exam plans is that you do have to be in good health. If you have moderate to severe preexisting conditions it is unlikely you’ll get approved. In this case, we recommend going with a fully underwritten plan with a medical examination. This is not necessarily a bad thing but the approval time takes anywhere between 3 to 6 weeks. 

Using existing policy

In rare cases, some individuals may have purchased life insurance in the past and forgot all about it. If you have an existing life insurance policy that will coincide with your SBA loan you can use it. This can be a good option if life insurance is the only thing holding your loan approval back. Just make sure you have enough coverage to cover what that policy intended to. The last thing you want is to leave your loved ones uninsured. 

SBA Loan Life Insurance Process and Tips

Meeting the requirement for your SBA loan with a life insurance policy can be broken down into steps. Now, don’t get overwhelmed because most of the work will be done by your agent. So let’s breakdown each step and provide some expert tips. 

• Find an independent agency – When securing a life insurance plan for SBA you have to work with an agency that works with multiple companies. Most independent agencies work with 10+ carriers so you’ll save time shopping. Also, if you get turned down with one company the agency will be able to use your existing info to reapply. For example, let’s say you went to an agent who has one company. If that company turned you down, you’d have to restart the whole process with another carrier even if it took months. 
• Prequalification – Once you find an agency the next step is to get prequalified to see your risk class. You’ll be asked questions about your health, background, built, family history and dangerous hobbies. Your responses will help to determine what rate you’ll pay and which company will be most likely to accept you. Don’t work with anyone that doesn’t do this vital process. A proper prequalification can be the difference between getting approved fast or not getting approved at all. 
• Get Quotes – Now that you and your agent have a clear picture of your overall risk class is time to shop around. Once more this is where working an independent agency like is a benefit. Life insurance rates are fixed by the law, so by working an agency like ours who has over 30 top-rated insurers you don’t have to shop around. Not only will this save money but also save you a lot of time. 
• Apply – The application process takes about 15 minutes to complete usually over the phone. When complete you’ll get a request to sign the application electronically and it gets submitted over to the carrier. If it is a no exam plan you’ll get a decision within a few minutes to a few days. Now with a medical exam plan expect 3 to 6 weeks to get approved along with a paramedic exam. The paramedic exam is when a nurse comes out to your home or place of employment. It involves the nurse drawing blood, collecting urine and checking your built. 
• Underwriting – Complete application goes to the company and gets assigned to an underwriter. This is a person who will review all the details to make a final decision on your policy. Besides the application details, they will also request information from Motor Vehicle Records, Medical Information Bureau, Pharmacy Records, and soft credit check. 
• Decision – Your application will either get approved as applied, rated or declined. If you’re approved you’ll get your policy within a week or instantly if you went with no exam. In the event that the underwriter found some information that wasn’t disclosed on the application you may get rated up. This means you’re approved but your monthly premium will be higher than applied. If your overall health or background information is considered severe you will be declined. If you do get declined there are alternatives. 
• Collateral Assignment Form – Congratulations, you’re approved for life insurance! But there is just one more vital step to complete for your SBA loan. You need to assign the policy as collateral to the lender. The reason we advise our clients to set up a collateral assignment versus directly listing the lender as a beneficiary is to make sure the lender only gets the balance. So be sure to list your family as beneficiaries of the policy and fill out a collateral loan assignment form for the lender. This form will be provided to you by the carrier and is usually one page long. 

For example, if you had a loan for $750,000 and you paid it down halfway and were to pass. The lender would get $375,000 and your family would get $375,000 as well if you set up a collateral loan assignment. If you didn’t the carrier would be getting a bonus of $375,000. 

What to do if You’re Uninsurable

If you have severe medical conditions, criminal background or dangerous occupation you may not get approved for life insurance. Unfortunately, there are some cases where no matter which company you apply with you can’t catch a break. As an agency, we have seen how frustrating this was and decided to find alternatives for our uninsured clients. We partnered up with a special risk insurer that can provide large amounts of life insurance on guaranteed acceptance. 

This means that regardless of your circumstances you will be approved. The best part of this policy was specifically designed for business loan purposes. The only catch is it is an annual renewable term so premiums will have slight increases every year. The cost of the policy is also higher due to the no questions and no exam approval. Although we use this as the last resort it is still a great option for many. 

If you find the policy too costly you may be able to go without a life insurance policy. This is done by getting a letter of denial from the insurance carrier. You can also get an independent agency to provide you with a signed letter stating that you’re uninsurable. If the loan underwriter sees that you did your best to get a policy and have some proof they may approve the loan without a policy. 

Getting an SBA loan is one of the best ways to expand your business enterprise. Especially with the recent expansion of the SBA loan program, many businesses are applying. As an applicant, you know that life insurance is one of the prerequisites your lender will require. This is as we learned is due to the fact that SBA requires businesses tied to an individual or small group to use life insurance as collateral. Most businesses happen to be set up this way in the first place. 

Your life insurance policy must meet certain criteria. It should cover both accidental and health-related deaths. The amount and the length of the life insurance plan should be the same as the loan you’re applying for. Also, the policy should not have any waiting periods before paying out beside the standard two year contestability period for fraud, suicide, or an act of violence/terrorism. 

We also learned that you can go for either a term or permanent life insurance policy. With the term being the more popular of the two due to cost and simplicity. The best option for someone looking to get life insurance for an SBA loan is a no exam. It’s very quick and you can skip the nurse visit. Of course, you can simply use an existing policy if you have a large amount that won’t affect your beneficiaries. 

The process of applying involves 7 steps that your life insurance agent will take care of. 

Work with Us

If you’re ready to move forward, we have veteran life insurance agents who specialize with SBA Loans on standby. As an independent online life insurance agency, we work with over 30 top-rated companies to get you the best rate. Some of our carriers include Prudential, Protective, Banner Life, AIG, and many others. Not only will we help you in the entire process from beginning to the end we also provide lifetime support. Life insurance for SBA loans is not a typical purchase, so let us help. 

If you have additional questions about life insurance for SBA loans, feel free to visit our quotes page in the right sidebar or call us at 888-492-1967

Mack is owner and life insurance expert at InsureChance. On a mission to create a way everyone can understand, afford and attain the right life insurance coverage to protect their financial responsibilities.

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Hi we are buying a business and need life insurance. We are 4 members to a LLC and SBA has asked for life insurance of $300k for our managing member . He recently got pulled over for a dui but is fighting the charges. We need the insurance asap, what should we do ?

Hey Pursharth,

Unfortunately, while he is fighting it most companies won’t provide any options. We do have a plan that is an annual renewable term which will provide a guaranteed issue cover for SBA Loans. This is usually the only option for people with a recent DUI or just any high-risk classification. Please contact us for more information as this will be a custom plan. Let me know if you have any more questions.

Most of the time you will be required to get life insurance to get approved for an SBA loan. You can get a traditional term life insurance policy for the length of the loan. The underwriting for this can take 4 to 8 weeks so make sure to do it as soon as possible.

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Life Insurance Requirements for SBA Loans (Best Guide)

Why do you need life insurance for sba loans, does every sba loan require life insurance.

Your life insurance will act as collateral and reduce the risk for the SBA. If you pass away before your loan is repaid, your policy payout will provide the funds needed to pay your loan off in full.

SBA Life Insurance Requirements

Life insurance amount.

Your coverage amount is required to be as much as your loan. For example, if you take a loan out for 500,000 dollars, your life insurance must be worth that much as well.

Life Insurance Coverage Period

Collateral assignment.

For example, the SBA 7A loan might not require you to have a collateral assignment in some circumstances, like if the loan is under 350,000 dollars.

What if You Don’t Qualify for Life Insurance?

What to look for in a life insurance company, get term life insurance, find no-exam policies, work with an agent or broker, look at return of premium plans, letting your life insurance lapse.

After you have gotten your life insurance, you must hold it for the entirety of your loan. If you allow your life insurance to lapse, the lender can see it as a violation. This can place your loan in default.

Navigate Your SBA Loans Requirements With Ease

7A Loans: The Pros and Cons You Should Know About

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Life Insurance for SBA Loans – What You Need to Know

Business owners must take out life insurance when they borrow from the SBA to help grow their businesses.

However, before you apply for a loan, it’s essential to understand the SBA collateral requirements.

Table of Contents

What is life insurance for sba loans, and why do you need it, how does life insurance work with an sba loan, what should you do if the sba waives the life insurance requirement, final words.

When life insurance for SBA loans is required, SOP 50 10 5(B) must be followed by lenders.

And while you can read this exciting 388-page document , I’ll tell you now that there are only four requirements regarding life insurance:

• “Lender must determine if the viability of the business is tied to an individual or individuals. In these situations, the lender must require life insurance. SBA Express and Pilot Loan Program lenders may follow their internal policy for similarly sized non-SBA guaranteed commercial loans.”
• “Life insurance required must be consistent with the size and term of the loan. The amount and type of collateral available to repay the loan in the event of the death of the borrower may be factored into the determination of the appropriate amount of life insurance.”
• “For each policy required under this paragraph, lender must obtain a collateral assignment , identifying the lender as assignee, that is acknowledged by the Home Office of the Insurer. The lender must assure that the borrower pays the premiums on the policy.”
• “The lender may accept the pledge of an existing life insurance policy. When a new policy is required, a decreasing term policy is most appropriate. Credit life insurance or whole life insurance should not be required.”

The problem with number 4 is that it states that a decreasing term policy is most appropriate. However, decreasing term policies are junk, overpriced, and don’t compare to the level term life insurance policies available.

A level-term life insurance policy is a better option at a lower price.

If you have high-risk health issues that make you uninsurable, a contingent coverage policy may be acceptable to banks.

A contingent coverage policy is an insurance policy for times when no other option is available.

If you’re not familiar with the application process, you may want to check out our Life Insurance 101 guide.

You can now get $500k of life insurance with no exam , sometimes within minutes. We even have life insurers that offer $1 million policies or more.

The process involves getting your records using the Human API process, checking the Medical Information Bureau , and reviewing your background, such as family medical history .

Get a term policy with an excellent conversion privilege, as it may allow you to sell your policy in the future should you no longer need it.

You may convert the policy to universal life or whole life insurance .

Correspondingly, you should also consider policy riders that might appeal to you, such as accidental death , waiver or premium, and return of premium riders.

When your bank requires a life insurance policy to lend you money, here’s how it works.

You can use an existing policy if you have one, or you’ll buy a new policy for loan purposes.

It doesn’t matter what type of life insurance you use for the loans.

You or your business will be the policy owner and can name your business as the beneficiary .

The policyholder then adds a collateral assignment.

The assignment protects the bank if you die and benefits you as the bank will only receive what they are owed, not the full death benefit.

If you have multiple business owners, the SBA may require key person life insurance for all owners.

You can name your spouse the beneficiary if you’re a sole proprietor. The bank would still get their loan proceeds, but your spouse would pay the balance.

SBA lenders have notified several clients that they no longer require life insurance as part of their loan.

What should you do if this happens to you?

Should you cancel your life insurance application?

Take a look at your loan…what happens to the loan if you die?

The amount of life insurance you get to cover this loan may help your family if you die.

Most SBA loans have provisions in your loan documents that give the SBA a security interest in the assets of your business. If you die, the lender first looks to the business’s assets to pay off the loan.

Consequently, if you signed personally for the loan, the lender might also look at your assets to satisfy the loan.

Surviving family members that depend on that business to provide for them may not be able to pay off the loan if there is no life insurance.

If you are personally responsible for the loan, does the lender have a right to your assets, home, etc.?

Get life insurance even if your SBA lender does not require it. The liquidity a life insurance policy provides will help your business and/or family members make it through the difficult times.

You must have life insurance when you’re looking to borrow money through an SBA lending program.

With RiskQuoter, we’ll ensure you get the life insurance you need at the best price.

Get a quote today!

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Home » Articles » Understanding The Connection Between An SBA Loan And Life Insurance

Understanding The Connection Between An SBA Loan And Life Insurance

• Written By: Jeffrey Manola
• Updated: November 2, 2023

The United States Small Business Administration (SBA) has been helping small businesses get their start, grow bigger, and recover from disasters since 1953.

Securing an SBA is a lengthy process. There are several steps to take and many requirements to take. It can take several months from the initial application to the funding of your loan. Borrowers often feel frustrated between steps or stressed when they hit unexpected hurdles.

What’s one hurdle that takes many borrowers by surprise?

The life insurance requirement. Most SBA loans require borrowers to have life insurance before the loan is finalized. The need for life insurance can often slow down the SBA loan process. In addition, borrowers aren’t always told they’ll need life insurance until very late in the loan process, leading to a scramble.

However, you can take steps to prepare and make the process quicker. Our guide will show you what to expect when applying for an SBA loan, explain how life insurance plays a role, and give you some tips to help you along the way.

SBA Loans and Life Insurance Basics

SBA loans are often for substantial amounts of money . The average SBA loan is just over $100,000 , and loan amounts can reach as much as five million dollars.

Loans of that size leave the government and the lenders they work with at considerable risk if the borrower were to pass away before paying back the loan in full. One way to guard against these losses is with collateral. 

Collateral is a term used to describe an item of value that could be used to repay a loan if payment stops. Some types of loans, such as car loans and mortgages, have collateral built-in. That’s why banks will repossess cars or foreclose on mortgages if payments stop. 

SBA loans are in danger of not being repaid in the event of an unexpected death. That’s why they often require life insurance policies as collateral. A life insurance policy you are often required to take out when obtaining an SBA loan will be used to pay the remainder of your loan balance if you die before you finish making payments. 

You’ll be required to take out a life insurance policy that has a death benefit amount that is at least as much as the entire amount of your SBA loan. You can also choose the type of life insurance policy you want, but most people prefer term insurance as it is the most affordable.

However, if you choose to take out a term insurance policy, it will need to have a contract length that is at least as long as the repayment terms of your SBA loan. Plus, your life insurance policy will need to be active before your loan can be approved.

Beneficiaries vs. Collateral Assignment

It is imperative to understand that your lender isn’t the beneficiary of your life insurance policy. Instead, your life insurance policy will need to designate as a collateral assignment to your lender.

You’ll still need to name a beneficiary of your choosing to receive your policy payout . Should you pass away while your life insurance contract is active, the payout of the death benefit would be distributed first to pay off the balance left on your SBA loan. Any remaining death benefit would then be paid out to your beneficiary.

Since your loan balance will depreciate over time, it would not make sense to name the lender as the beneficiary. Think about it this way; let’s say you have five years into your life insurance policy and have made five years of payments towards your loan balance.

That five years of payments towards your loan balance will have likely reduced the total payoff amount by quite a bit. Now, look at the death benefit of your life insurance policy. The death benefit of a life insurance policy stays the same. It doesn’t go down.

If you were to name the lender as a beneficiary and you passed away, let’s say five years after making several payments towards your loan, the insurance company would still be required to pay the full death benefit to the lender.

To avoid this from happening, life insurance companies offer collateral assignments. A collateral assignment is a policy form that names the lender as an assignee of the policy, similar to a beneficiary. 

However, an assignment still allows you to name a primary beneficiary that would be entitled to any remaining death benefit left over after the lender has been made whole on the loan balance due.

To see how this works, let’s say a woman named Monica owns a small business. Monica takes out a $500,000 SBA loan that is structured to have a 20-year payment plan.

Monica’s SBA loan requires that she take out a life insurance policy equal to the loan amount. Accordingly, she purchases a 20-year $500,000 term life insurance policy with her spouse listed as the beneficiary and the lender as a collateral assignee.

As Monica pays down her loan, the payout amount due to the lender would lessen, giving her spouse a larger piece of the death benefit if she were to pass away.

After Felicity finishes paying off her loan, she could still hold the $500,000 life insurance policy, and her spouse would receive the total payout if Felicity died unexpectedly.

SBA Loan Requirements

SBA loans can be very competitive, and the process can be a little complicated. It’s a good idea to make sure you meet all the requirements before you sit down to apply. You can gather all the financial and other information you need to make the process easier.

You’ll need to:

Your business must be physically based in the United States

Have a for-profit company – Non-profit companies aren’t eligible for SBA loans.

Have a business in an eligible industry – Certain industries aren’t eligible for SBA funding. This includes companies involved in gambling, money lending, life insurance, politics, and business that only earn passive income. In addition, individual lenders might have their own lists of ineligible industries.

Meet size requirements – The exact size requirements depend on your industry. Some industries allow businesses of up to 1500 employees, while others cap the max at only 500. Similarly, maximum revenues must be less than $7.5 million annually. You’ll also need a net worth of less than 15 million to qualify. These requirements change regularly. You can use this tool to check current standards.

Pass a background check – You’ll have a more challenging time getting an SBA loan if you have a criminal record. However, it’s not impossible. It will likely depend on the severity of your past offense and how long it was. You should be prepared to answer questions from your lender about your criminal background in this situation. 

Present documents that show the strength of your business – You’ll need to show your lender evidence that your business will succeed. A detailed business plan is a requirement. In addition, it’s a good idea to layout your product or service, marketing strategies, existing financial records, and projections. Resumes of your company’s management team can also help secure a loan. They can show lenders that your business is being led by people with experience and skills.

Present financial records and documents – Your lender can ask to see a variety of financial records. This might include tax records, bank statements, business financial statements, and payroll documents.

Have solid personal credit – Lenders will look closely at your credit when applying for an SBA loan. It’s a good idea to pull a copy of your credit report before you apply. You can make sure your credit is excellent and can check for errors in your report.

Have strong business credit – New businesses might not have a business credit report yet. However, companies that have been around for a few years will have a business credit report and score. Just like your personal credit, you’ll stand a better chance of securing a loan if your business credit is excellent.

• For more information: SBA 7(a) Eligibility and Qualification

SBA Loan Process

There are several steps in the SBA loan process. Following each step carefully improves your chances of a successful loan application. Steps in the process are outlined below.

Choose the best loan program for your business – The SBA offers several loan programs, including temporary programs to help small businesses during the COVID-19 pandemic. The most popular program for small businesses is an SBA 7(a) loan, but it’s good to carefully look over all the different loan options.

Choose a lender – The SBA works with many lenders to offer loans to small businesses. You can look through the lenders available in your area to see teams, rates, and amounts. It’s important to choose a lender that offers terms that will work for your business and has a track record of successfully working with the SBA and small businesses. 

Fill out your application – Your loan application will ask you for detailed information about your business and personal finances. You’ll need to provide detailed information about your business, current financial state, and future plans. You’ll generally need to provide information about your personal history and personal finances as well. The exact application will depend on your loan program and lender.

Receive a “Letter of Intent” – A “Letter of Intent” is a statement from a lender that you meet the initial criteria for a loan. It is not an approval. This is because your loan hasn’t yet gone through full underwriting. The ‘Letter of Intent” will let you know your interest rates and monthly payments if you are approved. You’ll need to sign this letter and send it back if you agree to the terms.

Wait several weeks during underwriting – SBA loan underwriting can take several weeks. There’s not much you can do during this time. Your lender will look over all the information you provided. They’ll pull your credit report, criminal record, and other data. This information will be used to determine your eligibility for a loan.

Receive a decision – Although it might sound like the last step, there’s actually still more to do after you receive approval. Your loan will move into the closing stages, and the lender will make sure you and your business have everything in place to receive your loan.

Secure a life insurance policy – You won’t be able to finalize your loan until you have a life insurance policy in place. As stated above, your life insurance policy will need to be at least as large as the total amount of your loan, and your term will need to last at least as long as the repayment term on your loan.

Make collateral assignment – You’ll need to have collateral assignment documents on your life insurance policy sent to your SBA lender. This can take up to a week. You’ll receive your funds once your lender receives and reviews these documents.

Life Insurance Process

It can be frustrating to apply for life insurance while you’re already applying for something major like an SBA loan. However, securing life insurance doesn’t have to be a headache.

There are some extra steps to be aware of when you’re applying to secure an SBA loan, but the basic process is the same as any other life insurance application:

Shop around for the best rates – You can use online tools to get quotes from life insurance companies and compare rates. It’s always a good idea to compare rates at multiple companies before applying anywhere. It’s also best to look for companies that meet your specific needs. For instance, some companies are a good bet for people who smoke , people who have health conditions , and for seniors.

Fill out your application – A life insurance application will ask for detailed information. You’ll need to fill out details about your health, hobbies, lifestyle, job, and more. It’s important to be truthful in your application. Lying on an insurance application is a type of insurance fraud.

The life insurance company will run your application through databases. They’ll likely find out any information you didn’t provide. This could result in your application being rejected. A rejected insurance application will go on your file at a database called the Medical Information Bureau. This could make it hard to get any life insurance policy, making it very hard to secure your SBA loan.

Take an exam – You can get life insurance without taking a medical exam. However, some companies do require it, especially with large death benefits are being applied for. Your exam will test your blood pressure, cholesterol level, height, weight, and more. It will likely also include a drug test.

Receive and accept a decision – The insurance company will notify you when the underwriting process is complete. Your application might be approved, denied, or approved at a higher monthly rate or lower death benefit amount than you initially applied for. You’ll then need to accept our approval and agree to the terms of your policy. You can generally do this instantly by electronically signing your new policy. Most companies will ask for your first payment before you sign your documents.

Request collateral assignment documents – Your insurance company likely has standard collateral assignment documents they use for SBA loans. Your insurance company can send these to your lender for you.

Collateral Assignment Process

Whether you choose to collaterally assign an existing life insurance policy or if you will be purchasing a new life insurance policy as instructed by the lender, the process will be the same for both options.

To assign a lender to your life insurance policy, you must complete the insurance company’s collateral assignment form. This is a standard policy form that will need to be requested from the insurance company. Your agent can request the assignment form for you, or you can call the insurance company directly to request the form.

The actual collateral assignment form can be completed relatively quickly. It only consists of a couple of pages, mainly containing the terms and conditions of a life insurance policy assignment as collateral security.

While collateral assignment forms will vary from provider to provider, most will start by having you list the assignee’s name along with the address and phone number of the assignee. The second part will consist of the policy owner’s information.

The last part of the collateral assignment form will require the signature of only the policy owner. The assignee is typically not required to sign the collateral assignment form. However, in some cases, a lender may require that you complete their collateral assignment form. In that case, the document may require the signature of both you, the policy owner, and the insurance company.

Suppose a lender requires the use of their collateral assignment form. In that case, the insurance company may still have you complete their form in addition to the lender’s collateral assignment form for legal purposes.

Once the collateral assignment form has been completed, the insurance company will process the request, taking up to five business days to complete. Once processed, notification will be sent to both the policy owner and the assignee confirming the assignment of the life insurance policy has been completed.

Release of Collateral Assignment

There is likely to be a time when your SBA loan is paid back in full to the lender. When that time has occurred, you must contact the insurance company to request a policy form referred to as a release of collateral assignment .

A release of collateral assignment form removes the lender entirely from the life insurance policy. This form will require the signature of both the lender and the policy owner signature.

Once all signatures have been collected, the release of collateral assignment can be returned to the insurance company for processing and removal of the lender.

Once the insurance company has processed the release of collateral assignment, both the policy owner and the former assignee will be notified by mail that the release has been completed.

The lender will no longer have ties to the life insurance policy as they will be fully removed from the life insurance policy.

Tips to Buying Life Insurance for Your SBA Loan

An SBA approval can help a business grow and thrive. Getting the news a lender has approved your loan can be life-changing. However, the last thing you want is to hit bumps in the road and long wait times while you get a life insurance policy in place. Fortunately, there are few things you can do to make the process a little smoother.

Choose Term Life Insurance

Suppose you must purchase a life insurance policy for an SBA loan. We highly recommend going with a term insurance plan. Term insurance is going to be the most affordable life insurance option as it is temporary insurance.

Most people who purchase term insurance will likely outlive their contract making the coverage less of a risk for the insurance company having to pay out a potential death claim. Therefore, term insurance rates will always be cheaper than the rates of permanent coverage, such as universal life or whole life insurance.

With term insurance, you will find various contract lengths starting from 10-years up to 30-years. This will allow you to choose a contract length that matches the length of your loan.

Another benefit to term insurance is that regardless of the contract length you choose, your premiums are locked in for the entire contract duration once you are approved for the coverage.

Look for Providers That Offer No Exam Policies

Fitting a medical exam into your schedule can slow things down. However, not all life insurance policies require medical exams. That can save you days or even weeks.

No medical exam policies work exactly like standard term life insurance policies and can be used as collateral for SBA loans in the same way . You can apply for the coverage amount you need and get an answer quickly, often instantly.

The one concern with no exam policies and SBA loans is benefit amounts . SBA loans can be as much as five million dollars. The coverage of most no exam policies won’t be enough to act as collateral for a loan that large.

Most life insurance policies that offer non-medical underwriting are often capped at a maximum of $1,000,000 or less in coverage. However, you can have more than one no exam policy. Therefore, it can be faster, and in some cases less expensive, to buy two no exam policies and use them as collateral for your SBA loan.

Keep in mind that although you won’t need to take a medical exam, you will still need to fill out medical information on your application. Your application will be checked against multiple databases such as LexisNexis , Medical Information Bureau, or MIB for short, which are used to help underwrite applications. The insurance company will also run a prescription report to view a list of any prescribed medications.

You can be rejected for a no-exam policy and could be required to take a medical exam as part of the underwriting process.

Consider Return of Premium Plans

If your SBA payment plan is 20 years or longer, we recommend looking into a return of premium term insurance plan. A return of premium term insurance plan is a traditional term insurance policy with a built-in feature that returns every single premium payment at the end of the term length.

The only catch is that the contract lengths are typically only available on both the 20 and 30-year term lengths with the return of premium term insurance. Thus, a shorter contract such as 10-years will not have a return of premium option.

Another concern is that you will pay a higher premium compared to a standard 20 or 30-year term contract that does not offer a return of premium. However, if you have no option but to get life insurance to secure your SBA loan, you may like the idea of getting all that invested premium returned to you when your term contract has ended.

Try Working with a Life Insurance Agent or Broker

Life insurance agents and brokers have experience securing life insurance policies for SBA loans. They can help you get policies that will meet the requirements.

They’ll be able to connect you with the best companies for your budget , health, and needed collateral amount. Plus, they’ll be able to work fast and can help you ensure the collateral assignment paperwork is taken care of once your policy is approved .

Make sure you work with an independent agent or broker who isn’t tied to any specific company and can give the best options from many life insurance companies.

Working with a life insurance agent or broker won’t cost you any additional money. This is because these professionals are paid by each policy they sell and not by the clients they work with.

They’re a great resource when you’re searching for life insurance . They can cut down on your stress and save you time, especially when you need life insurance for a specific reason, such as an SBA loan.

When You Already Have a Life Insurance Policy

If you already own life insurance coverage, you can use your current policy as collateral for an SBA loan. Like a new policy, it will need to be enough to cover the total SBA loan amount and will need to have a policy term that lasts at least as long as the repayment terms of your loan. You can easily contact your current life insurance provider to request collateral assignment documents.

However, using an existing policy is rarely a good idea . You likely bought your existing policy as an essential piece of your overall financial plan. Your personal life insurance policy is meant to protect your loved ones if you die unexpectedly. It replaces your income so that your family would still have financial security.

Using that policy as collateral for an SBA loan takes away the security it offers your family. Your policy would now be going to pay your SBA loan first if anything happened to you.

So your family might end without a death benefit from your policy or with only a very small one. That’s not the part your policy was intended to play in your financial strategy.

Of course, it’s possible your needs have changed since you bought your policy . For example, let’s say a man named Byron has a whole life insurance policy. He owns a small business and applies for an SBA loan.

Byron started his small business after retirement. His children are grown and financially stable on their own. His mortgage is completely paid, and his spouse is his business partner.

The whole life insurance policy amount is more than enough to act as collateral for the SBA loan. However, in this case, Byron and his spouse might decide that they no longer need the large benefit amount of Byron’s policy and assign it as collateral to the SBA loan.

Best Companies When You Need Fast Life Insurance Approval for an SBA Loan

Your SBA loan is on the way to being approved, but to finalize it, your lender requires you to have a life insurance policy that will act as collateral. You’ll have many excellent life insurance providers to choose from, but that doesn’t necessarily mean they will all be the best choice when you need approval quickly.

We will list below the top five life insurance providers that can offer high death benefit amounts, no medical exams, and quick approval times on their term life insurance plans to provide some helpful guidance.

These providers also offer some of the easiest online application processes currently available when it comes to applying for life insurance coverage and will be an excellent choice when you need coverage quickly.

When you need fast coverage, Bestow term life insurance plans must be at the top of your list. Bestow offers a completely digital online application process that can provide a decision for coverage that is nearly instantly.

The application process to receiving a response for approval takes an average of 9-minutes or less. Best of all, there are no medical exams required whatsoever. Choose from multiple term lengths with coverage amounts up to $1.5 million.

• For more information: Bestow Term Life Insurance Review

Ethos offers term insurance plans to help you meet your collateral assignment needs quickly. Like Bestow, the Ethos application process is provided entirely online, leading to an average approval time for coverage in as fast as 10 minutes from start to finish.

With Ethos term life insurance, coverage amounts go as high as 1 million dollars, with most applicants not being required to take a medical exam.

• For more information: Ethos Life Insurance Review

Fabric Life can offer those requiring higher coverage an easy online application process when applying for life insurance coverage. The entire applying process takes roughly 10 minutes from start to finish, with the potential of instant approval.

Coverage amount starts at $100,000 and goes as high as $5 million. If your application is $1,000,000 or less, there is the possibility of being approved without having to take a medical exam.

Ladder Life

Ladder Life will be your best option if you need a large amount of coverage to secure your SBA loan. The online broker offers a 100% digital online experience with death benefit amounts going as high as $8 million.

If your coverage needs are less than $3 million, you’re likely to experience an application process that requires no medical exams. However, any coverage amount over $3 million will need a medical exam.

Pacific Life

If you need life insurance for a collateral assignment and want the best price, Pacific Life is likely to be the company to offer you that. Applicants up to age 60 are eligible to apply for up 2 million dollars in non-medical underwriting.

In comparison, applicants up to age 69 can receive up to $1 million in non-medical underwriting provided they had a complete medical physical with blood work done in the last 18 months.

While Pacific Life can offer the potential for quick underwriting, they won’t be as fast as the other companies in our top five list.

• For more information: Pacific Life Term Insurance Review

Frequently Asked Questions About SBA Loans and Life Insurance

There’s a lot to cover when it comes to SBA loans and life insurance. For that reason, we have put together an extensive frequently asked questions section to help answer some of the common and even advanced questions about life insurance and SBA loans. 

At the very end of the FAQ section, you will find a form where you can ask a question of your own. If we missed out on answering your specific question about SBA life insurance or any question about life insurance in general, please be sure to use that form and send it to us.

We will be sure to get you an answer, and if we think it will help others, we will post it here in this article and the other list of questions.

How long does it take to get a new life insurance policy?

Before you can collaterally assign a life insurance policy, you need to have a policy in place to collaterally assign. Purchasing a new policy and the time it takes to be underwritten, approved, and placed in force will vary for everyone.

Generally, life insurance plans that require a traditional underwriting with a medical exam can take anywhere from 2-3 weeks for a healthy applicant without a history of medical issues. However, an applicant with a history of medical problems is likely to see longer approval times ranging from 3-8 weeks on average.

Suppose the underwriter needs to request medical records to help assist in underwriting your application. In that case, the time it takes for your doctor to send a copy of the records will also add to the overall underwriting timeframe.

If you need fast life insurance coverage and consider yourself healthy, many life insurance providers can offer an instant decision on approval. The only problem is that instant decision life insurance plans are typically reserved for healthier applicants, have limited issue ages, and often have a limit on the total amount of coverage you can get.

What if I am uninsurable for life insurance coverage?

Not everyone can qualify for life insurance coverage. Certain circumstances such as health issues or risky lifestyle habits can lead to a decline in life insurance, making you uninsurable for coverage.

Suppose you are uninsurable for a life insurance policy. In that case, the SBA will require that you obtain a signed letter from the insurance company stating that you are uninsurable for coverage and will need to decide whether or not they can back your loan.

Depending on the size of your loan, your lender may still be able to offer a loan. However, if your loan is of a sizable amount and the SBA cannot provide a loan because you are uninsurable, you can still seek out a loan from a bank or lender that the SBA does not guarantee.

How long does it take to collaterally assign a life insurance policy?

Once the insurance company has received the correctly filled out collateral assignment form, it will generally take 3-5 business days to process and make changes. Once the collateral assignment has been processed, both the policyholder and the assignee will be notified by mail that the changes have taken place.

Suppose you need a notification that the collateral assignment has been completed rather than waiting to receive it by mail. In that case, the insurance company can often send you a copy of the letter by email, which can then be forwarded to your lender.

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

According to the SBA, the life insurance policy used as collateral to a loan approval must be proportionate to the amount and the term of the SBA loan being applied for. So, for example, let’s say you are applying for a $1,000,000 SBA loan with a 15-year payment plan.

To match your SBA loan with a proportionate amount and contract length, the best option in this scenario would be a 15-year term contract with a death benefit amount of $1,000,000.

The term contract would last exactly 15 years and have a payout of exactly $1,000,000 if you were to pass away. Plus, premium payments for the life insurance contract would be fixed for precisely 15 years.

What type of life insurance is best to fulfill an SBA loan requirement?

Without a doubt, term insurance will be your best option. As mentioned, term insurance is affordable, and because your loan is temporary, it does not make sense to buy a permanent life insurance policy and pay significantly higher rates.

Can I use a universal life insurance policy as collateral?

Yes. You can use any type of life insurance policy as long as the benefit amount is enough to pay off your entire SBA loan. This means you can use a whole, universal, or term policy.

The only thing to keep in mind is that permanent coverage will always be much more expensive than term insurance because term insurance expires and permanent life insurance is forever.

Are collateral assignments only used to secure SBA loans?

Collateral assignments are common with SBA loans but are not limited to only SBA loans. For example, anytime a reasonable amount of money is being loaned out to a borrower, the lender can ask for a collateral assignment of a life insurance policy.

This ensures that the lender would receive the remaining payoff balance if the borrower were to pass away with an outstanding balance left on the loan.

Can’t I just list the lender as the beneficiary?

You can name the lender as a life insurance policy beneficiary, but it is not recommended. Think about it this way. With most life insurance plans, you choose a death benefit that will remain the same amount throughout the time you have your contract. Policy loans are temporary, and as you pay towards your loan balance, the amount owed will decrease with every payment.

When you name a beneficiary of a life insurance policy, that person or entity receives the death benefit when you die. For example, suppose you have been paying your loan balance and died before paying it off in full.

In that case, the insurance company will pay the full death benefit to the lender if they are named as the beneficiary of the life insurance policy. So even if you paid half your loan off at the time of your death, the lender would receive the full amount, and they are not required to give any of the money back.

This is why when borrowing money from a lender and part of the loan requirement is to have life insurance, you make sure you collaterally assign the lender and not make them a primary beneficiary.

With a collateral assignment, the life insurance company only pays the lender the amount left on the loan, and any remaining portion goes to your beneficiary. This could be a spouse or any other loved one with an insurable interest .

Does the lender have any control of the life insurance policy?

The lender has no control of the actual life insurance policy. The policy owner is the only person that has control of a life insurance policy.

Even if the policyholder and insured are two different people, the policy owner is still the only person with full control of the policy.

They are the only ones that can receive information on the life insurance coverage or make changes to the life insurance coverage.

Do all SBA loans require collateral assignment of a life insurance policy?

There are multiple forms of SBA loans, and requirements will be different with each type of loan. For example, the most common SBA loan 7(a) may not require collateral assignment of a life insurance policy under certain circumstances.

For example, SBA loans requested under a 7(a) less than $350,000 may not always require that you collaterally assign a life insurance policy.

However, it is still up to the lender if they require you to obtain life insurance to finalize the SBA, even if it is less than $350,000. This is especially true if the borrower cannot meet the minimum credit score or if the loan cannot be secured through other forms of collateral such as property, equipment, inventory, cash, or other accounts receivable.

What happens to my life insurance policy if my SBA loan is forgiven?

Some programs allow some types of SBA loans to be forgiven if they were approved during the COVID-19 pandemic. A forgiven loan is considered paid off. In this case, your entire life insurance policy would stay in place. Your death benefit would go directly to your beneficiary if you died unexpectedly.

Do I need to keep an active life insurance policy once the SBA loan is paid off?

If your SBA loan has been paid in full, you do not need to keep the life insurance policy. In most cases, if you initially choose a term contract that matches the duration of your SBA loan contract, your term insurance will end at the same time your SBA loan will be paid in full.

What happens if I forget to remove the SBA lender from my policy?

Once you have paid off your loan balance to the lender, you should remove them from your life insurance policy by completing a release of collateral assignment form.

Suppose you pass away after the loan has been paid in full and have forgotten to remove the lender from the policy as an assignee. In that case, it will only delay the death benefit payout to your beneficiary, but they still will receive the payout in full.

The insurance company will need confirmation from the lender that there is no money due on loan. Once verification has been made, the insurance company will process the payout to the named beneficiary listed on the life insurance policy.

What happens if I stop paying my life insurance premiums?

Letting your life insurance policy lapse would likely be considered a violation of your loan terms and would probably be viewed as a loan in default. If that happens, you run a risk of the lender requesting the principal balance be paid in full.

How do I locate an SBA approved lender?

The best starting place to find an SBA approved lender is by visiting sba.gov and utilizing their Lender Match program. The Lender Match program is a service offered by the Small Business Administration that matches you to lenders interested in taking on your loan for your business.

The process is straightforward. First, you need to fill out a form describing your business and loan needs. The form takes as little as five minutes to complete. Within two days of submitting your form, you will receive an email with contact information to the lenders interested in potentially taking on your loan request.

From there, you will be able to talk with the different lenders to compare rates, terms, fees, and any additional information. Once you have chosen a lender, you can complete their loan paperwork and be on your way to securing a business loan backed by an SBA lender.

Have a question?

Do you have a question about life insurance and SBA loans or just a general life insurance question? Please, ask away, and we will be sure to get back to you with an answer.

Plus, if we think your question can help our community of readers, we will be sure to add it to the FAQs listed here within the article.

Final Thought

SBA loans require collateral before you can get the funds you need to help your business. You’ll need a life insurance policy to act as this collateral. Your life insurance policy can be used to pay the remainder of your loan if you die unexpectedly. You’ll need a life insurance policy that has a death benefit worth at least as much as your SBA loan and with a term length of at least as long as your repayment terms.

One way to speed up the process and finalize your SBA loan faster is a no exam policy. At No Medical Exam Quotes , we can show you no-obligation quotes from the best no exam companies. Just fill out our simple form to start comparing rates today. You can also give us a call at 1-888-777-7574. We would be happy to guide you in your search for life insurance.

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Jeffrey Manola is the founder of No Medical Exam Quotes , an online insurance agency that strongly focuses on helping people shop for the perfect life insurance policy. He is a licensed life insurance expert and content creator for the website. Before becoming a life insurance agent, he served in the United States Marine Corps, transitioning from serving his country to helping families find affordable life insurance coverage beginning in 2009. Since starting a career as a licensed life insurance agent, Jeffrey has helped thousands of families with their life insurance needs.

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Small Business Administration (SBA) Loans and Life Insurance

Quick Life Insurance Options for a Small Business Administration (SBA) Loan

Already have an SBA loan in the works and need life insurance quickly? Quotacy can help.

We work with over 25 of the nation’s top life insurance companies and offer options that include quick coverage. Your agent will let you know if you’re eligible for these policies.

When applying for term life insurance on our website, we often recommend just going with the least expensive policy shown since your agent will confirm if it’s the best match for you anyway.

How to Use Life Insurance for Small Business Administration (SBA) Loans

To open a business, you need money. Most people don’t have cash on hand or have high enough credit limits to cover all the different expenses. To obtain these needed funds, many apply for small business loans.

As with any other loan, it needs to be paid back. Lenders also want guarantees that they will get their money back even if the borrower dies before the balance is paid. Life insurance can assure these lenders. To use your life insurance to secure your small business loan, you need to create a collateral assignment.

A Guide to Life Insurance for Small Business Owners

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Key types of life insurance, how life insurance beneficiaries get paid, what impacts your life insurance premiums, life insurance: explaining the essentials.

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• Life insurance requires you to pay a premium for your beneficiaries to receive a death benefit.
• Term and permanent life insurance are the two primary types of life insurance policies. 
• Age, health, policy type, and coverage amount influence the cost of your life insurance policy.

Life insurance is critical if you have dependents or people who rely on your income, like children, a non-working spouse, or aging parents you support. If you don't have dependents but have debt or own a business, you might still want to consider it.

Life insurance is a contract between you and the insurance company. In this contract, you agree to pay a premium (regular payments to the insurer) for a death benefit. A death benefit is a tax-free lump sum paid to your beneficiaries if you pass away while the policy is active. Your loved ones can use it to replace lost income from your passing, cover your debts, or final expenses. 

There are two types of life insurance : term life and permanent life. Term life insurance , covers policyholders for a set term, usually between ten to 30 years, and it's usually much more affordable than whole life. You can find our guide on the best term life insurance here.

Permanent life insurance offers lifelong coverage and builds cash value. Cash value grows your policy by earning interest on a portion of your premiums. The two most common types of permanent policies are whole and universal life insurance. 

When you apply for life insurance, you must choose your beneficiaries — the people who will receive your policy's proceeds. You can assign multiple beneficiaries and the percentages each will receive. 

If you pass away, your beneficiaries must file a claim for your death benefit. To do so, they must complete a claims form and provide a death certificate. When approved, the insurer will pay your death benefit, typically as a lump sum.

Take a look at the main factors that influence your policy's premiums : 

• Age: Age determines how likely you are to die during your policy. Younger policyholders typically see the most affordable rates.
• Health: Medical history is a significant factor in determining rates, as it also indicates your mortality risk. Those in better health usually pay lower premiums. While most policies require a medical exam for qualification, there are no medical exam life insurance policies , though you still have to answer a medical questionnaire.
• Policy type: Permanent life insurance tends to cost more than term life insurance because of its comprehensive features. Different types of term and permanent life insurance also result in differing rates. 
• Coverage Amount: The larger your death benefit is, the higher your premiums will be. Customizing your policy with riders or policy add-ons also increases your costs. 

How does life insurance work FAQs

It's a good idea to carry life insurance if a spouse, child, aging parent, or anyone else relies on your income. This ensures your loved ones won't face financial hardship in the event of your unexpected death.

Add up your debts, income, mortgage, your children's future education expenses, and final expenses to get a ballpark figure of the amount you need. Online life insurance calculators can help with the process. However, the best way to get an accurate figure is to work with an insurance agent or a financial advisor to help you identify all your coverage needs. 

The best life insurance policy isn't the same for everyone. Find the right one for you by comparing quotes from reputable insurers and working with an independent agent for personalized guidance.

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