Life Insurance for SBA Loan

searcher profile

January 19, 2023

by a searcher from University of Southern California in Miami, FL, USA

I have been told that in order to qualify for an SBA loan, lenders will require you to have a life insurance policy.

-Does the amount of the policy matter?
-Does it make a difference whether it is WHOLE vs. TERM?

Happy to hear any other recommendations you have. Thanks.

4
30
398
Replies
30
commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Life insurance is not mandatory on all SBA loans. It is typically required in one of the following circumstances:

1) There is only one primary Borrower / Guarantor. The Bank and SBA wants to be sure if something happens to that Borrower the loan gets paid.

2) The loan is under collateralized. They require the life insurance to at least cover the portion not fully collateralized.

3) Some lenders will require it no matter what, even if there are multiple owners / guarantors and the loan is fully secured, to provide additional protection, but that is not an SBA requirement but a lender requirement.

My recommendation is if you are searching is to start to get your policy in place ahead of time. I would try to get a policy for the full loan amount, but if the lender ends up requiring less, it is always easy to decrease the amount at a later date. The policy only needs to match the term of the loan. Most people opt for a term policy. If you have a 10 year SBA 7A loan, typically 10 year term insurance is not that expensive. And keep in mind the lender takes an assignment of the policy. They are not the beneficiary. You will want to make your family the beneficiary. If something happens to you and there is excess insurance benefits, those benefits go to your family after the SBA loan is paid off.

Now if you are older or have health conditions and the cost of the insurance is cost-prohibitive, the SBA does allow the Bank flexibility in waiving the insurance requirement due to cost. I have done plenty of deals where I either could not get someone insured or the cost was too high, and the Bank waived the requirement.

Lastly, although I am not an accounting expert, you need to check with your accountant for how you want to pay for the insurance. Life insurance owned personally is generally not taxable on death. However, I do believe life insurance paid for by a company can be taxable when it passes through the company to family. Again, something to check with your accountant on.

I hope this information is helpful. If you have additional questions please ping me here or directly at redacted Have a great day!
commentor profile
Reply by a lender
in United States
Hi ^redacted‌ -- excellent question. The amount of the life insurance benefit amount is subject to the SBA underwriter discretion. For example, if the proposed business acquisition loan project includes the owner occupied commercial real estate, the underwriter may only require the life insurance benefit amount to be based on the loan amount less the appraised value of the commercial real estate. Keep in mind, if there is an established Key Employee "tied to the revenues" of the business you will be acquiring, i.e. a licensed electrician where you as the proposed new owner do not carry that license, SBA underwriters may condition that not only you securing the life insurance policy, but also a life policy on the key employee tied to the business revenues. Every bank or non bank lender has a their own credit policy regarding the conditions of life insurance. I recommend to my clients out of the gates to at the bare minimum to apply for the estimated SBA change of business ownership loan project dollar amount as the benefit amount. You want to do this out of the gates as life insurance companies can take time to process policies. The larger the policy, the longer the processing. Whole or term life insurance policies are acceptable. A collateral assignment will be placed on the policy in the bank or nonbank name. If the business owner or if applicable, key employee should pass away, the SBA loan would be paid in full and any remaining benefit dollars of the policy would be credited to the assigned beneficiary. ***I have seen a couple buyers be declined for life insurance. One gal was declined because she was expecting a baby. Per SBA, a loan may not be declined if a borrower is not able to obtain life insurance. The underwriter will request a copy of the insurance company decline letter to enclose in the file should the SBA audit the loan file. If I can help answer any other questions, feel free to reach out to me at redacted -- Cheers! -^redacted‌
commentor profile
+28 more replies.
Join the discussion