Leveraging Term Life Insurance for SBA Loans in 15 minutes
You’ve started a business. You’ve been wearing a thousand different hats. You’re making it happen and you are ready for growth. After crunching your budget and assessing your company’s needs, you are ready to apply for a small business loan to take your business to the next level. What you may not realize, however, is the role that life insurance plays in this process. Life insurance? For a loan? You heard right. A life insurance policy is often the collateral used to secure small business loans. It helps the bank or financial institution that’s putting up the money to protect their investment in your business. So let’s talk about leveraging term life insurance to secure an SBA loan in under 15 minutes!
First Things First: Isn’t the SBA and not the Bank, Lending the Money?
Well, yes and no. The Small Business Association actually works in tandem with banks and financial institutions to maximize their lending and borrowing power in order to provide more loans than they alone could provide. The SBA by itself doesn’t actually lend money to businesses. Instead, they ‘back’ the business loan and secure the funds from the financial institution.
By ‘back the loan’ I am referring to the fact that the SBA will make itself responsible for a portion of the money lent to your business and be on the hook for paying the bank that portion should you default on your payments.
In this way, the SBA lowers the risk for the bank which allows the bank to lend more freely. And thus, the wheels of business keep spinning. Now, while the SBA has reduced the risk to the lender, they also desire to reduce their own risk in vouching for the money lent. The SBA has no desire to actually have to come up with the portion of the loan that they are guaranteeing to the lender. Which leads us to…life insurance!
What Role does Life Insurance Play in Securing an SBA Loan?
Now we get to the meat of the SBA’s risk strategy. In order to ensure that they will not be on the hook should something happen to you, the SBA requires entrepreneurs to purchase a life insurance policy that names the lender as the beneficiary.
Naturally, the amount of life insurance coverage needed will be enough to repay the balance of the loan. Should you pass away before paying off the balance, the lender will be paid in full by the death payout in the life insurance policy.
There can be other beneficiaries on the life insurance policy besides the lender. The important part is that the lender gets paid first. So if you take a loan for $50,000, then your policy will provide at least $50,000 payable to the lender upon your death. You could also take out a policy for $100,000 with $50,000 going to the lender and $50,000 going to your spouse or any other beneficiary. This is called a life insurance collateral assignment.
Life Insurance Collateral Assignment: The Key to Your Loan
In addition to requiring life insurance with a policy payout at least equal to the loan amount, you must also keep the policy in force for the duration of the loan time-table. This is one of the reasons that term life insurance is often used for the life insurance collateral assignment.
Term life insurance is a policy that lasts for a finite period of time known as the ‘term’. Terms of 5, 10, or 20 years are commonly used. The term is the period of time that coverage of the policy is in effect and should anything happen to you during this term, the payout will be activated.
So, if you have a loan that is going to be paid back with interest over a span of 20 years, you would need a term life insurance policy that has a 20-year term. Makes sense, doesn’t it?
How Long Will it Take to Purchase A Term Life Insurance Policy?
This is where the magic is. In the past, if you were to apply for an SBA loan and they told you that they required a life insurance policy equal to the loan amount in order to begin the process you would have been stalled.
The truth is, obtaining a life insurance policy used to involve a long underwriting process that required in-person medical examinations (blood and urine tests…yuck), an interview, health records, and more. After all of that, the insurer is finally able to determine whether or not you can be approved for a policy. The process could take 30 days or more, greatly delaying your ability to procure an SBA loan and grow your business.
Most business owners can’t afford to operate on such a drawn-out timeline. Fortunately, there is another way!
No-exam Term Life Insurance to the Rescue!
As the insurance industry evolved and technology allowed insurers to make risk assessments using advanced algorithms, the underwriting process was able to be shortened dramatically. Today, some companies offer the option of applying for term life insurance online and the ability to approve or deny coverage in as little as 15 minutes!
Bestow.com is an example of a website that allows you to do just that. So, now, if you are applying for an SBA loan and they require a life insurance collateral assignment, you are able to go online and in 15 minutes, if approved, obtain a term life insurance policy equal to the amount of your loan. It’s incredibly convenient and the rates for these policies are on par with traditional term quotes. Voila, you can get approved and secure that all-important business loan!
Are There any Restrictions on these Policies?
While every company that issues these rapid policies differs a bit, there are a few restrictions on who can obtain a policy online. On Bestow.com, for instance, you must be 55 years old or younger and there are a few states that are not served. Additionally, if you have a serious health condition you may be required to submit to a medical exam or a deeper dive into your medical history.
You also must keep your policy active by paying your monthly premiums each and every month. A lapsed policy is a dead policy and you would have to obtain a new one to meet your loan requirements with the SBA.
So Skip the Exam, Ditch the Interview, and Avoid the Needles
The beauty of online term life insurance is that you don’t necessarily need to bother with the hassle of medical exams and phone or in-person interviews. You can go from zero to hero in 15 minutes and the entire process is simplified. If you qualify for approval, your policy will be in force and available immediately.
So if you are in the process of procuring a loan through the SBA, you don’t need to hit the brakes when they ask you to get life insurance as collateral. Simply go online, sign-up, get a quote, and if approved, go back to doing what you do best: Building Your Empire!
