“Quick Tip”- Call us if you want the rates for the companies that will issue life insurance for SBA loans the fastest”
Why do you need life insurance for SBA loans?
Many times a small business owner will need to secure life insurance for an SBA loan. Why?
The Small Business Administration is a vital part of the government for small businesses. The administration helps small business secure money to expand or start a new business. This is usually in the form of a loan.
Typically, these loans are for tens of thousands of dollars or more. The financial institutions are exposing themselves to not only defaults, but also the possibility of death before the loan is repaid. It makes good business sense for the government and the lending institution to want to protect themselves from an unexpected death.
Does the bank become the beneficiary on life insurance for SBA loans?
In most cases the life insurance policy that is purchased is used as collateral to the bank or lending institution. The borrower would name a beneficiary just like when purchasing any type of life insurance. This can be a spouse, child or business.
Once the policy is issued and placed in force, the insured would sign a form know as a collateral assignment form. This form states that the bank would be paid back first on any outstanding loan payment. Any remaining money would be paid out to the estate or the named beneficiary.
It is very important that you not name the bank or lending institution the primary beneficiary. If this happens, and death occurs while the policy is still in force but no loan remains outstanding, the bank could then lay claim to the proceeds.
What type of policy is best?
When shopping for life insurance for SBA loans it probably best to look at term life insurance. Most bank loans are typically for a set number of years such as 10, 15 or 20 years. And since starting or expanding a business may already have finances tight, a term policy will keep premiums as low as possible.
Many times the financial institution or bank will wait until the last days or weeks before a loan closing to inform you that life insurance is needed before the loan can be completed.
This can make some borrowers panic and rush to get life insurance. Many times borrowers will overspend on coverage just to be able to close the loan. It is best to ask upfront if any type of life insurance will be needed to complete the loan?
By knowing if life insurance coverage is needed, you will be able to shop the marketplace and find the best policy at the most affordable cost.
How long does it take to secure life insurance for SBA loans?
Life insurance for SBA loans are typically underwritten just like any other life insurance policy. But, it is important to remember that many life insurance policies can be written on a non-medical basis. If time is of the essence, and you do not wish to go thru a medical exam and lab testing then the non-medical option can be a solution.
The non-medical option can save you alot of time in the underwriting process. But, remember since you are not doing an exam or blood work the carrier will typically charge you a higher rate than if you went thru the full exam process.
If you are not in a rush and are willing to go thru the full medical underwriting process this will give you the lowest rate.
Also, it is very important to understand that if you have some pre-existing medical history such as heart disease, diabetes, crohn’s disease, MS, etc. you must speak to an expert agent who can find you the most affordable coverage based on your medical history.
This also would include any high risk activities such as auto racing, sky diving, scuba diving, etc.
As with any life insurance policy, the rates are determined by a number of factors. Primarily rates are based on age, sex, tobacco use an amount of coverage.
If there is no medical history and the insured meets the height/weight guidelines of a particular carrier and there are no other outstanding factors, the preferred best class is the lowest risk class available. Below are examples of current annual rates based on someone qualifying for the preferred best rate class:
Male age 35 for $1,000,000 of protection
10 year level- $235
15 year level- $280
20 year level- $433
Male age 40 for $1,000,000 of protection
10 year level- $315
15 year level- $414
20 year level- $605
Male age 45 for $1,000,000 of protection
10 year level- $545
15 year level- $817
20 year level- $1,098
Male age 50 for $1,000,000 of protection
10 year level- $863
15 year level- $1,260
20 year level- $1,688
What should you do once your loan is paid off?
Once your SBA loan is paid off, you may still have several years left on your term life insurance policy. Since you no longer need the coverage for the SBA loan you could just let the policy lapse.
But, this could be a mistake. Since you purchased the policy when you were much younger the rates are probably still very affordable. You could continue the policy until the end of the term for additional family protection.
Also, you may have a conversion option with the policy. This could be a valuable benefit if you have had any type of health change since you took out the original policy. The conversion option allows you to keep the original underwriting risk class that you were issued at and allows you to lock in a new premium with no health questions.
If you need life insurance for SBA loans or just want to discuss your current life insurance situation, please contact us at 1-888-393-9003 or mike@specialriskterm.com
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