Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent Benji Carr

UPDATED: Jun 28, 2022

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Starting a new business or taking out the money that is necessary to support a business that you hope to grow is not always easy. In many situations, you may believe that you have all of the accurate information and compelling reasons for someone to provide you with a small business loan.

Life Insurance for an SBA Loan

However, you might not have appropriate collateral in order to make this a reality. Rather than letting this situation frustrate you and cause you to stop before you truly get started with a business loan program, think about all of your options in order for obtaining the appropriate collateral through a life insurance policy.

Growing or starting any kind of business requires a significant amount of capital even if you’re bootstrapping.

Whether its office equipment, real estate, inventory or any other number of expenses that pop up for business, the list can seem to go on and on for a business owner or a sole proprietorship. This usually tends to only add stress when you think that you do not have the financial materials in order to make this happen.

Sadly, qualifying for a business loan has become increasingly difficult, particularly in light of the 2008 recession.

Banks are sometimes reluctant about taking on any risks unless they can know in some way that their investment has a layer of protection in the event that you pass away prior to the loan being paid back or in situations where you may default on what is owned.

This is why there are four different types of life insurance you should consider using for a small business loan. Life insurance as loan collateral for a business loan can assist you to get lender approval by giving them some peace of mind that you will not default on your payments whether it’s through your own fault or passing away.

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Basics of Life Insurance for Business Loans

Using life insurance called term for the purposes of getting a business loan, you stay on as the insured individual and you might also be the policy owner. You also maintain the responsibility for paying the premiums on that policy.

The lending institution or the bank will be listed as the primary beneficiary so long as your business loan is still due. In the event that you wish to obtain this kind of life insurance policy, you will need to use what is known as a collateral assignment form.

This will allow the bank to be named as the primary beneficiary for the policy payments so long as the loan is in effect.

Typically, the bank will work directly with your life insurance company in order to execute this form appropriately.

In the event that the principal amount of the loan is lower than the death benefit on the policy at any time that a payment is made, additional funds may be given to your secondary beneficiary.

For this reason, you might name a spouse or a business partner to be able to claim the remaining life insurance policy funds after the bank has taken their share. There are several different things you need to keep in mind as you approach the process of getting a life insurance policy for a business loan.

How Much Life Insurance for Business Loan?

First of all, when you work directly with your life insurance agent or broker you need to tell them at the outset that you intend to use the policy as loan collateral. This enables them to prepare any additional paperwork that is associated with this transaction.

Make sure when you get quotes for your policy as well as when you apply that you obtain a term life insurance policy for the right time period to cover the repayment period of the loan.

For example, if you are taking out the business mortgage loan for 20 years, you will also need a 20-year life insurance policy.

Remember that most lenders will not finalize the process by giving you the loan until you can show proof of policy. It’s a bad idea to wait too long to talk to your life insurance agent because you could lose the opportunity to get the loan.

Bear in mind that depending on the company that you apply with and whether or not there are any other potential delays during the process, it can take a couple of weeks in order to get the life insurance policy approval.

In the event that there are other medical conditions associated with your application, the review process might even take longer.

Remember that most banks don’t want to wait too long, nor they can guarantee the original offer that was made to you. This is why you need to approach the life insurance policy process as early on as possible.

No Exam Life Insurance for Business Loan

You can expedite the process by getting a non-medical term life insurance policy which means that you don’t have to get a paramedical exam typically required for life insurance. These policies usually have turnaround times of approval for 48 hours.

However, they may cost more since the insurer is not getting the necessary health information to make a correct calculation about your mortality.

In the event that you want to make your business dreams a reality, and you determine that you need outside funding in order to make this possible, keep a term life insurance policy in the back of your mind as appropriate loan collateral as you begin to talk with lenders.

Make sure that you identify a good insurance agent from the outset of this process since doing so allows you to get your key questions answered sooner and helps you know that you have all your bases covered.

A knowledgeable insurance agent can assist you with all the stages of the process from getting a quote for coverage to getting the policy itself. Working with someone who has assisted others for getting a policy for a business loan is also a good idea since this process can be complex without knowing who to work with.

It can be frustrating to try to go through the business loan process for approval on your own and realize that you do not have any other assets that would qualify as collateral for receiving such a large loan.

Due to many reasons, including flexibility and affordability getting a term life insurance policy may be the right fit to give you the collateral you need. It will give the bank the peace of mind that they will receive payment for their loan if something were to happen to you.

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One Last Thing on Life Insurance for Loans

This can help move some lenders who may have previously said no into considering you like a loan candidate because they have the assurance they need that whether you default or pass away, they will be paid out on the loan. Remember that it is your responsibility for the life of a loan like this to continue making premium payments.

You could actually be defaulting or breaking the conditions that you have made with your lender if you stop paying the premiums on the policy. Read all of the terms and conditions and have an in-depth conversation with your life insurance agent before you initiate the application process so that you are clear about all of your rights and responsibilities.