Life Insurance for Business Loans, What You Need to Know

Not everyone knows that you will need a life insurance policy to get an SBA loan for your small business. An SBA loan, or Small Business Administration loan, can be a great way to jumpstart your business. Getting life insurance for this type of loan is quick and easy if you get the right type of insurance plan. Trying to find out everything you need to know about available policies can be intimidating, but we are here to help. Today, we are going to teach you everything you need to know about life insurance for business loans.

Do I Need Life Insurance For A Business Loan?

Yes, you will need life insurance for a business loan. The SBA loan will guarantee your loan by providing coverage if you happen to default on your loan. This allows your lender to have less risk involved when loaning money for your business. The makes getting money for small businesses much easier. Life insurance also ensures that your loan will be paid off in the event of your death before the loan has been paid off. This will come with stipulations, however, and we have listed a few below.

The Life Insurance Must Match Your Loan

When you purchase life insurance for a loan, it must be in the same amount as the loan. This is to ensure the loan can be paid off in the event of the death of the borrower.

The Lender Must Determine Viability Of The Business

Before offering a business loan, the lender has to determine that the viability of the business is in fact tied to 1 or more individuals. 

The Lender Must Obtain A Collateral Assignment

A collateral assignment must be obtained by the lender, identifying the lender as assignee and that the borrower pays the premiums of the policy.

The Lender Can Accept Existing Life Insurance

If you currently have existing life insurance, your lender can accept this if it matches the needs of the loan.

Requirements For SBA Life Insurance

The requirements for SBA life insurance as disclosed by SBA Loan Closing Documents for 7(a) loans states:

“Life insurance and/or disability insurance is not required for all loans, but the Lender should require life or disability insurance where there is a concern over whether the business could survive in the absence of an individual or small group of individuals that provide the management for the small business concern.“

The following factors must be met to satisfy the loan:

The Policy Must Be In-Force
Your life insurance has to be an active plan before funding from the loan is applied.

You Must Have Sufficient Coverage

You must have a sufficient death benefit to cover the amount of funding the loan is providing.

Your Coverage Must Last As Long As The Loan

The policy length must match or exceed the term of your loan.

Collateral Assignment Must Be Documented

A proper collateral assignment must be documented in order for loan approval.

What Is A Life Insurance Collateral Assignment 

The collateral assignment allows your lender to be paid off before your life insurance pays out to your beneficiaries. This is one of the most important steps of getting a loan using a life insurance policy. While this may seem a bit harsh, many people will take out a separate policy for their beneficiaries to ensure that they have the finances in the event of your untimely death. 

How Long Do I Need To Keep My Life Insurance Policy?

If you do not plan on keeping the life insurance you are getting forever, then you will at least need to keep it for the duration of the loan term. Most policies will revert back to a personal life insurance policy once the loan has been payed off. It is recommended to keep the policy for 10+ years after the loan is expected to be paid off. All in all, you are not required to keep the insurance policy once your loan is paid back in full, you can simply cancel the insurance policy or go with a different company.

Can I Use An Existing Life Insurance Policy?

Many insurance providers are going to allow you to use an existing life insurance policy under certain conditions. The main factor being that the current policy meets the terms of the loan that you are seeking. If not, you will have to modify your current policy or go with a new policy to satisfy the terms of your loan. 

If you do use your existing life insurance policy, you will need to consider that you may be putting your family at risk. If you were to die during the term, your life insurance benefits would go to paying off the loan first before your beneficiaries. This can put them in a tough spot if they have to pay off any debts or final expenses you may have.

How Quickly Can I Get Life Insurance?

Depending on which policy you go with, you can get covered in as little as 5 minutes or less. For those who are in good to average health, you may be able to get coverage in minutes with a no exam life insurance company. These policies are fully underwritten and do not require a medical exam which can adds days to your approval process. For those who have a more complicated family medical history or have current health issues yourself, you could be looking at 3-6 weeks for an answer depending on the company that you go with.


In conclusion, life insurance is essential to securing a business loan. There are many different facets of the process that you need to understand and we hope that we have covered them clearly throughout this article. Each policy provider is different so it is essential that you speak to your policy provider about any questions that you may have revolving around your business loan or life insurance. Securing an SBA loan can be quite simple once you know what you need and a life insurance policy should not hold you up.

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