If your company requires a loan, buying business loan life insurance may be wise to safeguard your organization in the event of your death.
By familiarizing yourself with the available policies and understanding their role as collateral, you can navigate this process more effectively.
This article provides valuable insights on aligning your policy term with the duration of your loan and utilizing existing coverage to your advantage.
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Business Loan Life Insurance
Small business owners frequently depend on loans from banks and credit unions to initiate or expand their businesses.
The loan amount accessible to a business owner is determined by several factors, like the company’s size, creditworthiness, and the collateral it can offer to secure the loan.
According to Forbes, roughly one-third of small business owners rely on loans to keep their businesses running or provide the capital needed to get a business off the ground or keep it going during tough times.
When looking for a business loan, one of the many factors your lender will consider is whether you have life insurance.
While life insurance is not always necessary to get a business loan, it can help prove to your lender that you’re serious about your business and have a plan in place if something happens to you.
Many small businesses are operated by a solo entrepreneur or only have a few partners with specialized expertise and education that is difficult to replace.
Mid-sized business owners also worry about paying for capital-intensive operations, larger payrolls, and loans on their company facilities.
Life insurance can replace key workers, keep the business running, pay off outstanding loans, and avoid liquidating any business assets to pay off those debts.
Life Insurance for SBA Loans
Life Insurance for SBA LoansThe SBA works with a network of approved banks that agree to loan money to business owners at flexible terms and fantastic rates.
The SBA loan program will guarantee between 75-85% of your loan amount, significantly reducing the lending risk for approved financial institutions.
The popular SBA 7(a) loan can be utilized for many purposes such as start-up, expansion, equipment, inventory, working capital, and business- real-estate purchases.
The SBA requires a life insurance policy to secure a small business loan when the small business is closely connected to one or more business owners.
According to the Small Business Administration (SBA), the “lender must determine if the viability of the business is tied to an individual or individuals. In these situations, the lender must require life insurance”.
When a business loan is not fully secured, a life insurance policy is required for the owners, consistent with the size and term of the loan.
The amount and type of collateral available to repay the loan will determine the appropriate amount of life insurance.
Financial institutions take life insurance as collateral to cover any shortfall in assets and assure the loan is repaid if a small business owner dies.
Most SBA lenders will require your policy’s death benefit to be equal to or greater than the current amount of your outstanding loan balance.
The term length of your coverage should match or be longer than the duration of the SBA loan.
Buying adequate coverage for a specific time frame prevents the bank from losing money if you die prematurely.
Collateral Assignment For Business Bank Loans
Collateral Assignment For Business Bank LoansHow is a collateral assignment used in a life insurance contract? A collateral assignment is the most common provision in small-company lending and is familiar to insurers and banks.
When life insurance for the SBA loan policy is in place, the bank will be the beneficiary on a collateral assignment form.
According to Lions Financial, if a business owner takes out a loan to generate income, and the lender requests that a life insurance policy be used as collateral, the premiums paid on the policy may be eligible for a tax deduction.
If the business owner dies with an outstanding loan balance, the insurance company pays off the loan from your policy’s death benefit, with any remaining benefits going to your named beneficiaries.
Tips for Buying Life Insurance for SBA Loans
Tips for Buying Life Insurance for SBA Loans- Avoid buying a life insurance policy before understanding your bank’s loan requirements for the death benefit and term duration.
- Buy the face amount required by the lender to ensure that your loan application is approved.
- Buy the proper term length to cover your loan for its entire duration.
- You will be required to provide a proper collateral assignment form before the loan is approved.
- If you pay off your loan sooner than expected, you cancel the policy without facing penalties.
Purchasing Business Loan Life Insurance
Purchasing Business Loan Life Insurance The cost of life insurance for business loans depends on factors like the type of policy, death benefit amount, and the individual’s health condition.
Younger and healthier owners may only need a telephone interview to get coverage.
However, older individuals might have to undergo a medical examination to purchase a new policy. Due to age, the premiums will be higher for older business owners and employees.
When selecting a business loan policy, you must decide between an affordable term life insurance or a more expensive permanent life insurance option.
Term Life Insurance for Business Loans
Term Life Insurance for Business LoansTerm life insurance is the most popular policy self-employed people purchase to cover their business loans.
Term life insurance plans offer a level death benefit with premiums guaranteed for between 10 and 30 years.
You can minimize the premiums payable for the policy by matching your term length closely to your business loan’s amortization schedule.
When your term insurance expires, you will have paid off your business loan and should no longer need to carry any life insurance.
We have provided you with some affordable rates on business loan life insurance.
Business Loan Life Insurance Cost
| $500k | $750k | $1mm | |
| Age | 10 | 10 | 10 |
| 30 | $15 | $20 | $22 |
| 40 | $19 | $25 | $29 |
| 50 | $42 | $64 | $75 |
| 20 | 20 | 20 | |
| 30 | $21 | $27 | $33 |
| 40 | $28 | $41 | $52 |
| 50 | $73 | $108 | $142 |
| 30 | 30 | 30 | |
| 30 | $32 | $47 | $58 |
| 40 | $53 | $76 | $99 |
| 50 | $125 | $185 | $252 |
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Business Loan Life Insurance Case Study:
Matt is a successful business owner of a trucking company that needs a $1,000,000 loan to expand its operations and buy more equipment.
The lender agrees to provide Matt with a million-dollar SBA loan to be repaid over ten years.
The bank will bet the beneficiary on the required collateral assignment of his 10-year life insurance policy.
If Matt dies, the $1,000,000 death benefit will pay back the outstanding loan balance to the lender, with any remaining benefits going to his beneficiaries.
Affordable Life USA is dedicated to assisting entrepreneurs in finding a cost-effective term insurance plan that suits their business’s coverage requirements.
Our user-friendly business loan insurance calculator allows you to swiftly compare quotes and discover the ideal policy for your company.
By utilizing our online tool, you can save valuable time and effortlessly locate the most affordable life insurance quotes tailored to your specific needs.
Universal Life Insurance for Business Loans
UniversaUniversal life insurance is a kind of permanent coverage that provides flexible premiums, death benefits, and cash values.
Universal life policies are not often used to cover a business loan because they are more expensive than term insurance.
That’s because universal, indexed universal, and whole life insurance each have a cash value that grows over time.
The investment component allows policyholders to take out policy loans, withdrawals, or collateralize against their cash value.
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Using Cash Values as collateral for a loan
Affluent business owners who have an existing policy with substantial cash value can use this money as collateral for a smaller business loan.
When using the value of a life insurance policy to help secure a loan, the lender will require a permanent life policy with accumulated cash value.
Your policy’s cash value is considered a tangible asset that can be pledged against to secure a business loan.
If you default on the loan without dying, a lender would be repaid as a collateral assignee from the policy’s cash value.
This collateralization concept differs from borrowing at a low-interest rate or taking out a life insurance loan.
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Taking out a loan against cash Values
The Infinite Banking Concept popularised being your own banker by borrowing against the cash values inside your policy instead of taking out a bank loan.
The cost of whole life insurance and the time needed to accumulate enough cash values and dividends make this a long-term strategy.
Infinite banking is challenging for business owners on a tight budget and may not help those needing larger loans for their company.
Plus, if you cannot repay the loan from that policy’s cash value, it decreases the death benefit by the loan amount and interest.
Borrowing too much money from a cash-value life insurance policy could affect the performance with higher premiums or cause the policy to lapse.
Buying Business Life Insurance
Buying Business Life Insurance We have developed a structured process to assist successful companies in meeting their personal and business life insurance needs.
Affordable Life USA has decades of experience offering many strategies that can serve various planning objectives for your company.
Here are some additional individualized solutions that we offer businesses that may be more cost-effective than you think.
- Key Person: Keyman life insurance is a policy that provides a business much-needed capital in the form of a death benefit if a key person should die.
- Buy-Sell Agreement: Many successful partnerships also have formal buy-sell agreements using life insurance to divide the business shares with the death of a partner.
- Executive Bonus: With an executive bonus, owners pay for their employees’ life insurance premiums, and the family members will receive the death benefit.
If you have any questions about what kind of coverage may work best for your situation, contact us today!
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FAQs: Life Insurance for Business Loans
FAQs: Life Insurance for Business LoansDo business loans require life insurance? According to the Small Business Association (SBA), if a lender deems the business owner crucial for the continued prosperity of their enterprise, they may request key person life insurance. The necessary coverage amount is determined by factors such as loan size and available collateral for repayment.
Can you get insurance on a business loan? Absolutely. Business loan insurance helps businesses recover from any disruption caused by the loss of a crucial contributor to their operations. The company holds the policy and pays premiums, while the lender is named beneficiary.
Can I use life insurance as collateral for a loan? Life insurance can serve as a strong guarantee for lenders when providing loans. It acts as collateral, ensuring the loan will still be repaid if a small business owner dies. The policy’s death benefit should match your loan’s current outstanding balance.
Are you personally liable for an SBA loan? SBA loans hold business owners personally accountable, making them responsible for repayment. Failure to do so may result in the lender pursuing legal action to recover the outstanding debt.
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Affordable Life USA is dedicated to providing comprehensive life insurance solutions to families and business owners throughout the United States.
For over thirty years, our agency has provided a platform for comparing hundreds of life insurance policies without the stress of high-pressure sales tactics.
Our experienced team of financial planners has helped thousands of clients obtain affordable coverage through our efficient online application process.
Our founder, Eric Van Haaften, expanded our consumer-centric sales model nationally by leveraging the influence of renowned publications such as Time, Newsweek, and The Wall Street Journal.
Eric acquired his love for quantitative analysis while getting his business degree from Ferris State University, which provided a solid foundation for his analytical approach to financial planning.
Eric Van Haaften, LUTCF
1-877-249-1358
