Small Business Administration (SBA) loans are the lifeline loan policies for small entrepreneurs who seek to expand or manage the capital of their business. It is offered by the government through various financial institutions like banks. Term life insurance for SBA loans is often a requirement for the approval of the loan.
Term life insurance is considered a good asset for the lender to provide Loans. In this, we will break down the complexities into simple understandings to take the right action.
Term Life Insurance For SBA Loans
SBA loans require collateral or security, based on which the lender will approve the loan. Often, the term life insurance policies is used as collateral in the loan application. When a business owners apply for an SBA loan, the lender requires a term life insurance policy with the lender named as the collateral assignee.
Especially in the case of SBA 7(a) or when there is a key-person dependency lender requires it. This ensures that if the borrower dies during the loan term period, then the outstanding amount of the loan is repaid from the term life insurance coverage.
Why Is Life Insurance Required for SBA Loans?
Using term life insurance as collateral or security is an effective way to get a loan. As the lenders are also doing business and providing a loan facility with some interest. In the case the borrower passes, then the repayment may be jeopardized.
To ensure that no loss will occur in such a situation, life insurance policies require. The insurance must be equal to or higher than the lending amount.
This applies to :-
- Sole proprietors
- Key-person borrowers in LLCs or S corporations
- Loans with a long repayment period (10+ years)
- Loans without sufficient collateral
Insurance As Collateral For A Loan
Using insurance policies as collateral is a general practice done by almost all financial institutions for the approval of an SBA loan.
The lender can use the insurance as collateral in two ways :-
- Collateral Assignment : In this, the borrower names the lender as the collateral assignee. With this, the lender gains the legal rights to receive the death benefits equal to the owed amount of the SBA loan.
- Surrender Value Collateral : This is applicable for insurance policies that feature cash value accumulation, like permanent or whole life insurance policies. In this, the lenders have access to cash out from the cash value if the borrower is unable to pay.
This practice of using expedited term life insurance for SBA loans is called SBA financing.
Collateral Requirements of Term Life Insurance For SBA Loans
There are many types of SBA loans present, and all have different term life insurance policy requirement that needs to be fulfilled. The type listed below :-
SBA 7(a) Loan
- General business expenses like working capital, equipment, real estate, and debt refinance.
- Often required if the loan exceeds $350,000 or if the business relies on a key individual (e.g., sole owner). For more information you can Check there.
SBA 504 Loan
- Fixed assets such as land, buildings, or large equipment.
- Generally required when the loan is dependent on a key person or if the business lacks sufficient physical collateral. For more information you can Visit there.
SBA Express Loan
- Fast-track working capital loan for smaller needs.
- Not commonly required, but may be requested at the lender’s discretion. For more information you can Visit there.
SBA CAPLine
- Revolving credit lines for cyclical working capital.
- Typically, not required unless the line supports a key-owner-dependent business.
SBA Microloan
- Small loans to startups or underserved borrowers.
- Rarely required due to small size, but some lenders may request it case-by-case basis.
Usually, the type of SBA loans that are highly dependent upon the borrower’s income and other assets are likely to require term life insurance for the SBA loan.
Steps to Follow for Getting an SBA Loan
Determine loan requirements like the amount of loan, term period, and collateral policies. You must verify that the lender needs to be named as the collateral assignee in your term life insurance policy.
Apply for a policy that has at least equal coverage amount as the loan amount. Also, ensure that the term length covers the loan period.
Request a collateral assignment form from your insurer. Also, submit a signed form to your insurer and the lender for further processing of the loan.
Once the collateral assignee is confirmed, it does not take too much time to process the loan and money lending.
Best Term Life Insurance For SBA Loans
People also ask what the best or cheapest term life insurance is for SBA loans. Some top insurance companies are mentioned below that can be a great and trusted match for collateral in an SBA loan:
| Insurance Company | Best For | Policy Term Options | Notable Feature |
| Banner Life | Overall value | 10, 15, 20, 30 years | Competitive rates, fast underwriting |
| Haven Life (by MassMutual) | No medical exam | 10–30 years | Fully digital process |
| Protective Life | Low-cost coverage | 10–40 years | Affordable and customizable |
| Pacific Life | High coverage needs | 10–30 years | Strong financial ratings |
| SBLI | Quick approvals | 10–30 years | Excellent for SBA collateral use |
What Happens After The Loan Repayment?
When the borrower repays the loan fully, the lender issues a collateral release notice by which the insurance policy becomes free from the lender’s side. The policyholder gains full control over the policy and can continue the policy for future protection.
This flexibility makes the term life insurance the best choice for SBA loans and provides some benefits with death benefits support to the family.
Final Thoughts
Expedited term life insurance for SBA loan provides the lender collateral security in cases where the borrower passes before the complete repayment of the loans. This gives peace of mind to both the lender and the borrower. Also, after closing the loan, the insurer can continue this insurance policy for their future.
With different types of loans, their requirement for the term insurance policies may vary, and it is noted that the coverage amount of the insurance policy must be at least equal to the loan amount you are applying for.
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Frequently Asked Questions – Term Life Insurance For SBA Loans
Does an SBA loan require a life insurance policy?
Yes, especially loans like SBA 7(a) require a life insurance policy as collateral with equal coverage amount as the loan amount.
Can you take a loan from term life insurance?
No, term life insurance doesn’t allow cash value accumulation. But a term life insurance can be used as collateral for SBA loans.
How to use life insurance as collateral for a loan?
If you are taking a loan and want to use life insurance as collateral, then you have asked the insurer agent about this facility, and a collateral assignment form needs to be filled out.
