Life insurance for SBA loans

If you have a small business that is looking to get started or grow, you may be considering a loan from the Small Business Association (SBA). Over 9 million loans worth over $750 billion were granted to small businesses around the country in 2020. Securing an SBA loan is a lengthy process, and one requirement that often surprises people is that SBA loans often require the borrower to have life insurance before the loan is finalized. Fortunately, securing a life insurance policy no longer takes weeks. You can secure a policy, in minutes and completely online. No need for a medical exam, just answer a few health questions and you could be covered the same day.

Why do I need a life insurance policy when applying for an SBA Loan?

Legal protection

SBA regulations (SBA SOP 50 10 5 (B)) mandate that any SBA loan for a business that “is tied to an individual or individuals” requires life insurance to protect the lender. This way, in the unlikely event of your death, the lender will be able to recoup the amount lent to you.

Protection for your family

Life insurance will also help protect your family from potential financial hardship in the event of your unfortunate demise. The payout from the life insurance policy can help your spouse/heir cover any loss of income and pay off any debts you might have, such as a mortgage or other loans such as the SBA loan. That way they can focus on mourning and recovering, not looking for funding to pay off your SBA loan.

What type of life insurance policy should I buy?

The most common form of life insurance policy SBA loan borrowers purchase is a term life insurance policy. Borrowers typically prefer this term life over offerings (e.g., universal life or whole life) because it is generally more cost effective, has a flexible design, doesn’t have surrender charges or hidden fees, can be canceled anytime, and is easy to understand.

What is term life insurance?

Term life insurance features the most straightforward and affordable life insurance option by covering you for a set "term" (typically 10 to 30 years). If you pass away during the term period, your beneficiaries receive a cash payment. 

When applying for a SBA loan, choosing term length depends on your need, but buyers usually tie the term duration to the loan duration. For example, if you are taking out a 10-year loan, then it makes sense to buy a 10-year term policy (at minimum) to meet SBA loan requirements.

How long does it take to get covered? 

The answer depends on who you are buying it from and their underwriting process. Traditional life insurance processes can sometimes take up to 8 weeks to process your life insurance application because of blood tests, medical exams and more. However, Ethos has streamlined the life insurance process, using modern technology and data analytics to create an online life insurance application that takes only 10 minutes or less. You won’t need to schedule any doctor exams or blood tests, just answer a few health questions. We’ll give you our best and final offer within minutes and you can choose to activate your policy immediately.

What if I have pre-existing medical conditions?

Even if you have a pre-existing condition, you can still get life insurance—there are options out there.

Ethos offers products designed to provide coverage for those who are often unable to get it due to their pre-existing conditions.

Can I cancel the policy if I pay off the loan early? 

Absolutely. You can always cancel the policy before the term duration ends without any penalty fee. However, we suggest you keep the policy around even after paying off the loan to help protect your family. Having an active policy could protect your family from income loss, business debts and more if something were to happen.

You’ve put a lot of work into building your business. Life insurance coverage can help ensure that your business could continue operating if something happened to you

I heard I need to do something called “collateral assignment” when buying this policy to fulfill the SBA loan requirement. 

What is it?

A collateral assignment allows the insurance company to pay your lender only what they are owed, with the balance paid to your beneficiary.

And why do I have to do it?

This is an essential step after you have bought the policy. When you make payments on your SBA loan, the loan balance decreases while the payout from the life insurance policy remains the same. Since the bank does not (and should not receive) the full life insurance payout upon your demise, you need to set up a collateral assignment restricting the banks to only claim the portion of the payout that is still owed to them. That way, the bank is not being overpaid, and your beneficiaries can receive the remaining balance.

At Ethos, we can help you set up a collateral assignment. Upon activation, contact our service team and we can help you get it finalized.

Can my Ethos term policy be used for non-SBA business loans?

Yes. Non-SBA business loans that require life insurance to protect the lender can use an Ethos term life insurance policy.

Secure a policy today ahead of your SBA loan.

Ethos makes online life insurance more accessible with flexible coverage options that fit various budgets. And the application process is seamless and secure, taking the stress and guesswork out of shopping for an affordable life insurance policy. 

To get started, complete the online questionnaire to view policy options and rates. Then apply to receive a quick decision regarding your eligibility and rate, often on the same day. Apply now.