Trying to get quality insurance products at an affordable price can be a tricky process.
When applying for a small business loan through a bank or the governmental SBA (Small Business Administration) program, some small business owners are surprised to learn that one of the requirements is having a life insurance policy with a collateral assignment to the lender.
When you’re going through the small business loan process, it can be difficult getting all of the paperwork completed and meeting all of the different requirements. Having to secure a life insurance policy can be just one more annoyance that is added to your plate.
Keep reading to explore all of the different parts of getting life insurance for a small business loan. If it’s always been your dream to have a business of your own, an affordable life insurance policy shouldn’t keep you from achieving that dream.
What Is Life Insurance As Collateral Assignment?
Basically, you set up a life insurance policy tied to the loan – if you die, any amount left on the loan would be paid off from the proceeds of your life insurance, while the rest would go to your chosen beneficiary. While life insurance may seem like a personal matter, banks and the SBA view it as a smart financial investment. A life insurance policy helps ensure that the loan will be paid back should the main business owner die. Typically before you can close on an SBA Loan, proof of such coverage is required. If you find yourself in this position, continue reading on how it all works, or you can start comparing life insurance quotes right on this page.
What Type Of Policy Should I Buy?
Most bank loans or SBA loans mature within 10 years or less. As a result, most prudent business owners opt for a 10 year term life insurance policy that extends across the life of the loan. This kind of short term policy is the most desirable option since they are the cheapest form of life insurance. Upon death, the funds are paid directly to the bank to cover the remainder of the loan so family members don’t bear the financial responsibility associated with the loan.
Medical vs No Medical Exam Life Insurance
If you need to get a policy in place quickly to close on your loan, you can consider a no medical exam policy. While no medical exam may cost a bit more than policies that require an exam, depending on the amount of your loan, and your age, the pricing difference may be minimal. We work with one life insurance company that offers up to $399,999 without an exam, and several others that offer up to $250,000 in coverage. While a no medical exam sounds like a convenient option on the surface, there are some things to consider before buying a plan that forgoes the exam.
The glaring advantage to a no exam policy is that you can skip the medical exam and underwriting process. The purpose of the medical exam is to see if you have any severe health complications that will make you too great of a risk to insure, but without the medical exam, your health won’t hinder you from getting an insurance policy.
Additionally, no exam policies go into effect on a much shorter timeline that underwritten policies. That standard policy can take as much as a month to go through the full application process, while a no medical exam plan can be in place in as little as just a couple of days.
Just like every other type of plan, there are going to be some pitfalls. Since you are not going through an underwriting process, you will pay more for the coverage you receive. This is true of any no exam life insurance policy. To get the best premium rates for the dollar of coverage you will need to go through underwriting and get a traditional life insurance policy.
Finally, no exam policies have limits to how much coverage you can receive. If you need a policy in the range of $1 million to $2 million then there isn’t a no exam option that large. Only a term or permanent policy will meet that kind of face value need.
Setting Up Your Policy
Once you’ve found a 10 year term life insurance policy to fulfill the needs of the small business loan, you need to designate a beneficiary. It may seem like you need to name the bank as the beneficiary to the loan, but avoid doing so. If you pay off the loan early, you do not want the bank to collect the death benefit should you die before the life insurance policy’s term ends.
To designate the policy as the required collateral for the loan, you will need to complete a collateral assignment form. The borrower and the bank sign the form and give it to the life insurance company so the company is aware that the policy is collateral for a bank loan. This gives you an additional layer of protection since the insurance company pays only the balance of the loan upon the borrower’s death. The remainder of the death benefit goes to your chosen beneficiary.
Why Work with an Independent Agent?
This differentiates us from agents that only work with one company, in that we work to get you the best rates from all the top life insurance companies in the United States. This way you know you are getting the best rates and not just the best rates that a single carrier has to offer.
We also help you set up the collateral assignment and can work directly with your bank or lender to make sure everything is set up correctly for you to close the loan. You can compare quotes on this page or call us at 888-552-6159 to get the process of getting a life insurance policy in force.
It’s important to note that the insurance policy that you buy is only going to satisfy the requirements of the loan, it won’t provide any coverage for your family. During this process is a great time to look at getting insurance coverage for your family.
Life insurance can be one of the best investments that you ever make for your family and your small business. Even if the loan doesn’t require that you get an insurance plan, you should consider applying for coverage anyways.