For many entrepreneurs, securing financing through the Small Business Administration (SBA) is a critical step in starting or expanding a business. What some owners don’t realize, however, is that life insurance is often part of the approval process.
SBA-backed lenders frequently require borrowers to carry a life insurance policy before funds are released. The reasoning is straightforward: If the business owner passes away, the policy ensures the loan can still be repaid.
Here’s how life insurance and SBA loans are connected, the circumstances where coverage is required, and what entrepreneurs should expect.
Why Life Insurance Matters for SBA Loans
The SBA itself doesn’t lend money. Instead, it guarantees a portion of loans issued by banks and other financial institutions, which reduces the lender’s risk. Because many small businesses depend heavily on the owner’s involvement, lenders want to protect against the risk that the company could not repay the loan if that individual died unexpectedly.
In those cases, a life insurance policy (often structured as “key person insurance”) becomes a safeguard, guaranteeing that the outstanding balance can be covered.
When Coverage Is Required
Not every SBA borrower will need life insurance. Lenders generally look at two factors:
- Business structure: Sole proprietorships, single-member LLCs, single-shareholder corporations, and certain partnerships are more likely to face requirements, since these models often rely on one individual.
- Dependence on the owner: If the business cannot reasonably continue operations without the principal owner, lenders typically mandate coverage.
Loan type can also make a difference:
- SBA 7(a) loans: Most often require life insurance equal to the full loan amount, unless substantial collateral is already pledged.
- SBA 504 loans: Coverage is usually required only if collateral falls short of the loan balance.
Common Requirements
If life insurance is required, lenders typically expect policies to meet several conditions:
- Policy amount: Coverage equal to or greater than the outstanding loan balance.
- Active status: The policy must be in force before funds are released.
- Collateral assignment: The lender must be listed as assignee, giving them rights to the benefit up to the loan amount. (Learn more about collateral assignment.)
- Coverage length: The term should extend at least through the repayment period.
Without these in place, applications may be delayed or denied.
Using an Existing Policy
Entrepreneurs sometimes ask whether an existing life insurance plan can satisfy SBA requirements. While possible, there are trade-offs. Assigning benefits to a lender means those funds may not be available to a family in the event of the borrower’s death. For this reason, many business owners choose to purchase a separate policy specifically for the loan.
Life Insurance & SBA Loans
Life insurance requirements for SBA loans are designed to protect lenders and ensure loan repayment, but they also offer a layer of financial security for the business. Even when not mandated, some owners choose to carry coverage as a safeguard for employees, customers, and partners.
Ready to get started? See what life insurance offers are available to you now with Everyday Life’s online life insurance calculator.
About Everyday Life Insurance
Since 2018, Everyday Life Insurance has been on a mission to simplify the life insurance process and make coverage accessible for families across the United States. As an independent and fully licensed online insurance broker, the company uses cutting-edge technology to help customers find the best life insurance plan tailored to their unique needs and budget. To learn more, visit everydaylifeinsurance.com.
Media Contact
Jake Tamarkin
jake@everydaylifeinsurance.com
