Small business association (SBA) loans are the loan providers for US-based small businesses. They help new entrepreneurs to give physical shape to their ideas or grow their business by providing monetary support for buying equipment and so on.
However, to be able to get loans for SBA, Small business owners are required to have life insurance.
You must be wondering why you need life insurance to get loan approvals. Then this article might help you answer some of your confusion. So let’s start reading.
Why Does SBA Ask For Life Insurance?
When a small business owner goes to the Small Business Association for a loan, they will ask the business owner to show his life insurance policy. This is done to protect the lender and make sure that he is paid back every cent he loans to the loan seeker.
When a lender gives money, he needs proof that he will be paid back every cent. A life insurance policy gives that assurance. When a person asks for a loan, he has to pay it back. In case he dies before paying back the loan, the death benefit will be used to pay back the loan.
Types Of Life Insurance Policies Business Owners Can Look Into
There are two types of life insurance policies that a business owner can look into if he has to get one for SBA loan approval. These two types are,
- Term life insurance
- Whole life insurance
When you are applying for SBA loans, make sure you get either one of the insurance first so that it is active by the time your loan is approved.
Term Life Insurance
As the name suggests, this type of life insurance is for a limited period. Therefore, it is called temporary life insurance. You will make a contract with your insurance provider for a designated time. Usually, the term should last enough till you pay back the SBA loan.
Term insurance is also an affordable option. However, it should be equal to the amount of loan you have taken. For example, if you have asked for a $50,000 loan, then your insurance should be worth $50,000.
Whole life insurance
Also called permanent insurance, whole life insurance will cover you for the rest of your life. This type of insurance will have a bigger death benefit, however, it can be expensive too.
If you are seeking a life insurance policy for the sale of SBA loan approval, then this might not be an economical option.
Tips For Choosing Life Insurance Policy
Here are some tips you should follow when choosing life insurance for sba loans.
1. Choose Term Life Insurance
When you need life insurance just to get the SBA loans, you do not need to spend your money on whole life insurance. Permanent insurance can be expensive, and quite useless when used for repaying loans.
If you choose a term insurance policy, then you can have greater flexibility. You can choose the time for the term to end.
For example, if you have a $50,000 loan to be repaid in 20 years, you can choose a 20-year term for the life insurance policy. This is not only economical but also if you manage to repay the loan before insurance ends, you can enjoy the end benefit for personal use.
2. Choose Insurance Provider With No Exam Policy
Medical examination before insurance approval can slow down the process. If you are short on time and need to get an SBA loan as soon as possible, then look for insurance providers who have no medical examination policy.
This policy might not be feasible if you want life insurance for the financial stability of your family, however, for the sale of loan approval, it can be a good option.
3. Find An Insurance Agent Or Broker
If you involve an insurance agent or broker in this process, you can get done with the process much more quickly. Insurance agents who work with SBA know how things work.
They will speed up the process for you by telling you what to do and how to do it. Without an agent, you will have to rely on yourself. You might make mistakes that can slow down the process.
4. Always Name Your Primary Beneficiary
The death benefit by the end of life insurance is given to the beneficiary. Your SBA lender should not be your beneficiary. Always name a primary beneficiary who will be awarded the remaining part of the death benefit once the loan is paid off.
When a person with life insurance dies, the insurance company provides a death benefit to the assigned beneficiary. When an SBA lender is involved, the death benefit is first used to pay them off.
If the loan borrower had paid back a significant amount of loan in his life, then the remaining portion of the death benefit should be given to the beneficiary, that can be a family member.