Here is what you need to know before purchasing Life Insurance to Cover an SBA Loan.
This article covers:
- What types of life insurance are best for covering a small business loan
- What you need to know about beneficiary wording on your policy
- Why working with an independent agent is best for your pocketbook
Types of Life Insurance to Cover an SBA Loan
Level Term Life Insurance – You don’t want to pay a penny more than you have to, so be sure your life insurance term length 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 life insurance policy for an SBA loan.
Annual Renewable Term – If your loan term is less than 10 years, your best bet might be an 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 policyholder 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.
What To Know Before Purchasing Life Insurance to Cover an SBA Loan
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.
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.
FAQ’s for Life Insurance to Cover SBA Loan
Should I go with term or universal/whole life insurance?
I recommend using term life, with a term length equal to the life of the loan. Why pay more than you have to?
I’ve heard that the application process for life insurance can take a long time and I’m in a rush. Is there a faster option?
Absolutely! No-exam insurance has a very fast turnaround, and many opt to go with this. It is slightly more expensive than the alternative, but it has its benefits.
Some Other Helpful Articles:
Essential Information on Life Insurance for Businesses
Types of Life Insurance
Life Insurance on Indispensable Employee
Using Life Insurance with a Buy-Sell Agreement
Why Own Life Insurance Outside of Work?