Life Insurance for SBA Loans: 5 Big Mistakes to Avoid & How to Apply

If you have applied for a Small Business Administration (SBA) loan and need life insurance to be approved, the advice below will help.

Life insurance is typically a necessary component of your SBA loan approval. You will want your life insurance policy to do two things:

  1. Satisfy your SBA loan requirements
  2. Be issued quickly

Below, we’ll discuss the 5 big mistakes we see people make when applying for life insurance for SBA loans. We’ll also show you how to avoid them.

Table Of Contents

  1. 5 Big Mistakes to Avoid with Life Insurance for SBA Loans
  2. How Much Does Life Insurance for an SBA Loan Cost?
  3. How to Apply for Life Insurance for Your SBA Loan

5 Big Mistakes to Avoid with Life Insurance for SBA Loans

Here are the 5 big mistakes to avoid in getting life insurance for SBA loans.

5 mistakes to avoid with Life insurance for SBA loans

Mistake #1: Legal Requirements are Ignored

Don’t ignore the fine print of your life insurance requirements to secure your SBA loan. According to SBA’s SOP 50 10 5(B) (a lengthy document describing SBA’s loan requirements and process):

Life insurance requirements for an SBA loan

In other words, most lenders will require the borrower to secure life insurance before the issuance of a small business loan can be finalized.

If the individual(s) is directly connected to the livelihood of the business, the lender will necessitate a life insurance purchase.

Most small business loan recipients are undoubtedly tied to the viability of their business. Chances are, in order for you to receive your loan, you will need to provide proof of appropriate life insurance coverage.

Mistake #2: The Collateral Assignment is Neglected

To set up life insurance for an SBA loan the right way, you must understand the collateral assignment.

What is a Collateral Assignment?

A collateral assignment is a designation of an entity (i.e. your lender) as a conditional recipient of some of the death benefit of your life insurance policy.

Concerning SBA loans, the collateral assignment entitles your lender to an amount of the death benefit that would pay off the balance of your loan, should something happen to you.

The remaining death benefit, once the loan has been repaid, would go to your other beneficiaries.

Why are Collateral Assignments Used?

Collateral assignments provide a safety net for the lender, negating some of the risks on their end.

What are the Steps to Set Up a Collateral Assignment?

Specific steps need to be taken to set up a collateral assignment properly:

  1. Apply for life insurance with an independent life insurance agent (they will access top no physical life insurance companies to find the best policy for your needs).
  2. List beneficiary for policy (i.e. spouse).
  3. Complete collateral assignment – a separate document to be signed and notarized.

Note – a collateral assignment is different than your beneficiary. The collateral assignment allows your lender to receive only the portion of your death benefit that will pay off the loan.

The remaining death benefit goes to your beneficiary.

Do Not Name Your Lender as a Beneficiary

Your lender should only be entitled to the specific loan amount you owe, and not a beneficiary to your entire death benefit.

Let’s consider an example:

You secure a small business loan for $80,000. In the process, you take out a life insurance policy to satisfy the SBA loan requirements. Your life insurance policy’s face amount is $100,000.

You set up a collateral assignment for your lender for the specific amount of your loan. Should something happen to you, the collateral assignment is paid first and your beneficiary receives the balance of your death benefit. 

Bottom line – collaborate with an expert independent life insurance agent to verify that your collateral assignment is set up properly.

Mistake #3: No Exam Life Insurance is Not Considered

Often, life insurance is needed in a hurry to secure your SBA loan. No exam life insurance (non-med) typically shaves weeks off the application process.

No exam life insurance is life insurance issued without the medical examination of the applicant.

How Do I Buy No Exam Life Insurance?

While each carrier uses its own process, you can expect the following general steps:

  1. Submit application (usually electronically/over the phone)
  2. Participate in a phone interview, lasting about 20 – 30 minutes
    • Your interview will include basic questions about your health, medical history, lifestyle, and occupation
  3. Application decision

Is No Exam Life Insurance More Expensive?

The cost of no exam life insurance is, in many cases, competitive with fully underwritten life insurance.

As an example, here are quotes for a healthy 35-year-old male for a 20-year term no exam policy for $100,000:

  • No Exam: $10.41/month
  • With Exam: $9.12/month 

With such a small difference in cost, most find it worth it to opt for the no exam policy. Remember, quotes are examples only, and your specific quote may vary.

Why SBA Loan Applicants Choose No Exam Life Insurance

  • No exam life insurance can be issued within a day, instead of the weeks that traditional policies take. This means your SBA loan can be finalized much faster.
  • Prices are competitive in many instances.
  • You get to skip everything involved in the medical exam like nurses, needles, and liquid samples.

Mistake #4: The Policy Face Amount (and Term) is Not Appropriate

Your life insurance policy must correspond with your SBA loan.

SOP 50 10 5(B) states:

Life insurance amount and term requirements for sba loan

Your required life insurance policy must be for an amount that will pay off your SBA loan. Additionally, the policy must be for a term that lasts as long as your SBA loan term.

In other words, avoid purchasing a policy that’s for too little or for too short of a term length.

Consider this example:

You are in the process of obtaining an SBA loan for $90,000. Your loan repayment plan will last for 20 years. As a requirement for your loan, you purchase a 20-year term, no exam life insurance policy for $100,000.

You complete a collateral assignment for your lender. Should something happen to you, the loan would be paid off and the balance of the death benefit would be paid to your beneficiary. 

Mistake #5: You Don’t Partner with an Independent Life Insurance Agent

Think of an independent agent as someone sitting on the same side of the table as you. They have your best interest at heart because they’re not held captive to a particular life insurance carrier.

Independent agents shop the top-rated carriers to find the best policy at the best price to fit your needs.

There is no one-size-fits-all life insurance policy. You’ll want to partner with someone who can evaluate your needs and find the best carrier and specific policy for you.

How Much Does Life Insurance for an SBA Loan Cost?

For a general idea of cost, evaluate the following quotes.

Quotes are for 10-year term no exam life insurance policies.

Keep in mind, most SBA loans are limited to 10 years, except for real estate acquisition or construction (source: U.S. SBA Loan Fact Sheet).

10 Year Term Life Insurance Quotes For Male 30 - 39 Years

30 Year Old$7.14$9.46$13.76$20.64
31 Year Old$7.14$9.46$13.76$21.07
32 Year Old$7.14$9.46$13.76$21.07
33 Year Old$7.14$9.46$13.76$21.07
34 Year Old$7.14$9.46$13.76$21.93
35 Year Old $7.14$9.46$13.76$21.93
36 Year Old$7.31$9.89$14.62$22.79
37 Year Old$7.57$10.32$15.48$24.51
38 Year Old$7.83$10.75$16.34$25.37
39 Year Old$8.08$11.18$17.20$27.43
Samples only. Subject to change.

10 Year Term Life Insurance Quotes For Female 30 - 39 Years

30 Year Old$6.88$8.60$12.04$18.06
31 Year Old$6.88$8.82$12.47$18.51
32 Year Old$6.88$8.82$12.47$18.49
33 Year Old$6.88$8.82$12.47$18.49
34 Year Old$6.88$8.82$12.47$19.35
35 Year Old $6.88$8.82$12.47$19.35
36 Year Old$7.05$9.24$13.33$20.21
37 Year Old$7.22$9.46$13.76$22.05
38 Year Old$7.48$9.89$14.62$22.79
39 Year Old$7.65$10.32$15.48$24.51
Samples only. Subject to change.

10 Year Term Life Insurance Quotes For Male 40 - 49 Years

40 Year Old$8.34$11.61$18.06$28.81
41 Year Old$8.77$12.47$19.78$32.25
42 Year Old$9.20$13.33$21.50$34.83
43 Year Old$9.72$14.41$23.65$39.13
44 Year Old$10.23$15.70$25.80$43.97
45 Year Old $11.03$16.77$28.38$45.50
46 Year Old$11.44$17.85$30.53$52.24
47 Year Old$12.04$19.14$33.11$56.35
48 Year Old$12.64$20.64$35.69$61.86
49 Year Old$13.33$22.15$38.27$68.69
Samples only. Subject to change.

10 Year Term Life Insurance Quotes For Female 40 - 49 Years

40 Year Old$7.91$10.75$16.34$25.37
41 Year Old$8.26$11.40$17.63$28.81
42 Year Old$8.60$12.26$19.35$31.39
43 Year Old$9.03$13.12$21.07$34.83
44 Year Old$9.46$14.19$22.79$38.27
45 Year Old $10.06$15.05$24.94$41.13
46 Year Old$10.41$15.91$26.44$45.15
47 Year Old$10.84$16.99$28.38$48.59
48 Year Old$11.35$17.85$30.53$52.89
49 Year Old$11.95$19.14$32.68$57.19
Samples only. Subject to change.

10 Year Term Life Insurance Quotes For Male 50 - 59 Years

50 Year Old$14.10$23.65$41.71$75.51
51 Year Old$15.05$26.02$46.44$84.35
52 Year Old$16.00$28.81$51.83$93.10
53 Year Old$16.98$31.61$57.57$104.91
54 Year Old$17.68$35.00$63.88$115.50
55 Year Old $19.34$38.06$70.48$130.38
56 Year Old$20.98$41.50$76.93$142.33
57 Year Old$22.53$45.36$85.36$156.95
58 Year Old$24.17$49.39$92.02$172.43
59 Year Old$26.23$54.44$101.90$192.21
Samples only. Subject to change.

10 Year Term Life Insurance Quotes For Female 50 - 59 Years

50 Year Old$12.86$20.43$35.26$62.35
51 Year Old$13.21$21.72$37.84$66.88
52 Year Old$13.65$23.44$41.21$74.11
53 Year Old$14.00$25.16$44.19$79.63
54 Year Old$14.44$26.91$47.69$84.00
55 Year Old $15.49$29.53$51.63$94.50
56 Year Old$17.33$31.39$55.56$102.64
57 Year Old$19.16$33.63$59.50$109.81
58 Year Old$20.38$36.04$64.75$118.76
59 Year Old$21.76$38.92$69.66$128.57
Samples only. Subject to change.

How to Apply for Life Insurance for Your SBA Loan

Most SBA loans require a life insurance policy. Fortunately, there’s never been a better time to purchase life insurance, especially without a medical exam.

To quickly secure a life insurance policy for your SBA loan, do two things:

  1. Partner up: Collaborate with an independent agent (that’s us) to find the best policy at the most competitive price.
  2. Prepare: Understand your life insurance needs as they pertain to your loan. Be ready for the application process by having important information ready – life insurance term length and face amount, your basic information – health, medical history, occupation, lifestyle, beneficiaries.
    • Note – Should you have any questions about life insurance for SBA loans, an expert independent agent will guide you through the process.

To get started, simply fill out our instant no exam quote tool.