SBA lenders are once again requiring a life insurance policy on the life of the borrower(s) as a loan guarantee. Here are some things to keep in mind as you shop for coverage.
Term – You don’t want to pay a penny more than you have to, so be sure your life insurance term lines up with your loan term. If your loan has a 10 year term, you’re in luck. 10 year term life insurance happens to be the least expensive type of life insurance. A level term policy will most likely be the lowest cost policy.
Beneficiary Wording- If you’re paying principal and interest on your SBA loan, your balance will decrease every year. Don’t just write the bank or credit union as the 100% beneficiary. Special wording is required so that in the event of your death, you only want the lender to receive enough money to wipe out your loan balance, and nothing more. The beneficiary wording should be as follows: ”ABC Lender, as their interest may appear. Balance is payable to Jane Doe, Spouse.” This way, the remainder can go to your spouse, mother, brother, etc.
Return of Premium – Since you’re likely entering into this insurance contract looking at like another “expense”, why not add a return of premium rider so you don’t mind the extra payment. The return of premium rider pays you all your premiums back at the your term, assuming there hasn’t been a death. If you die, the lender gets its money. If you live, you get all your premiums back. It’s a win-win.
Annual Renewable Term – If your loan term is less than 10 years, your best bet might be annual renewable term. This way, you pay the actual cost of insurance each year at your attained insurance age. This is generally cheaper than level term in the early years, and more expensive in the later years.
Return of Premium Life Insurance – Why look at your life insurance policy as a necessary evil. Add the return of premium rider and at the end of the term, if the insured has not passed away, the policy holder will be reimbursed with 100% of the premiums paid into the policy. This way, your SBA insurance coverage actually costs nothing more than the opportunity cost of another business venture you could have pursued with that capital. But the return of premium is guaranteed.
Medical Issues – If you have medical issues, such as high blood pressure, high cholesterol, diabetes, sleep apnea, epilepsy, or whatever the case may be, you need to talk to an independent insurance agent like me so he/she can shop for the best deal for you. Not all carriers treat these conditions the same. Some are more lenient than others on certain conditions. Half the battle in obtaining the lowest cost life insurance policy to cover an SBA loan is applying to the right insurance carrier.
