If you are a small business owner it’s likely that you may have considered getting a small business loan or are considering getting one now. Many business owners get loans directly from their bank, or through the SBA (Small Business Administration) which is a government program that works along with banks to lend money to small businesses.
If the success and profitability of your business relies heavily on you being active in the business, banks or the SBA may require that you get a life insurance policy. This will allow the bank or the SBA to get paid back should you die. When you get a term sheet for your loan with the requirements to get approval, you might see that a life insurance policy equal to the amount of the loan is required before you can close on the loan.
Since most bank loans, or SBA loans are typically for terms less than 10 years, you should consider getting a 10 year term policy for the amount of the loan. A 10 year policy will be the cheapest option, and since the funds will be used to pay the bank and not your family, you should look for a short term policy, and shop for the best rates as well.
When you get an SBA life insurance policy that is specifically for a bank loan, you don’t name the bank as beneficiary. You wouldn’t want to do that since you may pay off the loan, die a month later, and the bank would then collect your death benefit.
Instead you would name a loved one as a beneficiary. The way the bank is protected is that once the loan is approved, and your life insurance policy is issued, you fill out a collateral assignment form. This form, signed by you and the bank is given to the life insurance company and lets the insurance company know that your policy is part of a collateral for a bank loan. This also protects you since the insurance carrier will only pay the balance of the loan should you die, and not your entire death benefit. As time goes on and you pay off more of the loan, more of the death benefit belongs to your family.
When looking for a life insurance policy to use as collateral for a bank or Small Business Administration loan, make sure you work with an independent insurance agency that can shop the best rates for life insurance for you. In addition if you have any pre-existing health conditions, we recommend that you work with an agency that specializes in high risk life insurance, and can match you with the right company and can help you get approved.
Author: Liran Hirschkorn