Why Life Insurance Delays Most SBA Loans

October 5, 2020
Jonathan Fritz
B.A. Risk Management
Life Insurance Agent

Applying for an SBA loan can be a frustrating and time-consuming process. There are around 17 steps you'll need to take and multiple requirements you'll need to meet. The whole process can take between two and three months to complete. One requirement some borrows aren't initially aware of is life insurance. It's understandably frustrating for many people to have to apply for life insurance during the process of applying for an SBA loan. It can be even more frustrating when the life insurance application process is lengthy and drawn out, leading to delays in processing the SBA loan. 

However, the process is necessary to secure an SBA loan. Life insurance acts what is called “collateral assignment” when you apply for an SBA loan. When you make a collateral assignment you're agreeing to use funds from your life insurance policy to pay off your SBA loan if you die before the loan term is complete. The life insurance company then provides a document to your lender. The SBA requires life insurance collateral assignment for loans to ensure that your loan can be paid even if you were to unexpectedly pass away. 

Thankfully, you can prepare for this requirement and take steps to make sure that applying for life insurance doesn't slow down your SBA loan. We've broken down the process for you below, so keep reading for steps, tips, and company suggestions. 

The SBA Loan Process

sba loan process

One of the most important things you can do to improve your chances of approval for an SBA loan is to make sure you follow every step. As an applicant, your first step is to choose a program and lender. The SBA offers several programs, although most small businesses apply for what's called an SBA 7(a). Once you've chosen a program, you'll need to choose a lender. You'll need to look closely at what terms, rates, and amounts lenders offer to make sure they're a good fit for your business. It's a good idea to choose a lender with a proven track record of working with the SBA and small business owners.

You can start your application once you've selected a lender. You'll need to provide information on your business including proof of ownership, current cash flow, and what you plan to do with the loan money. You'll need records like bank and other financial statements to support this information. You'll also need to fill out some additional forms along with your application. The exact forms will depend on your loan type, lender, and personal circumstances. Commonly requested forms will ask you to fill out information on your personal history and personal finances. 

Your lender will process your loan once they've received all your information. If your application meets initial criteria, you'll receive a “Letter of Intent” from the lender. This letter is not your approval. Instead, it will let you know what your terms will look like if you are approved. It will give you an initial idea of what your interest rates, monthly payments, and other details will be. You'll need to send the letter back if you agree to these terms. 

Once the lender has the letter back, they'll start the intensive underwriting process. At this stage, your lender and the SBA will look at all the information you provided. They'll also look at information such as your credit report, criminal history, and business history. 

They'll use this information to determine your loan eligibility and your ability to repay the loan. The underwriting process can take several weeks. 

You'll receive a decision once underwriting is complete. If you're approved, you'll move onto the closing steps. Even though you're approved, you'll still need to take a few more steps. The lender will need to perform due diligence and make sure you and your business have everything in place to finalize the loan. During this stage, you'll need to acquire life insurance as collateral. Often, the need for life insurance isn't even mentioned until you reach this stage. This is why loan closings end up being delayed by life insurance applications, and why it's often very frustrating for borrowers. 

The Life Insurance Buying Process

Understanding the life insurance process can make it a lot easier. Just like when you start the SBA loan process, you'll need to choose a life insurance company before you begin. Once you do, the process will move through the following steps:

  1. Application — You'll need to fill out an application to start the life insurance process. Be prepared: much like your SBA application, a life insurance application will ask for a lot of information about you. You'll need to set aside time and answer every question the application asks you. In some cases, a medical exam might be part of your application. 
  2. Underwriting — Your application will then go through the underwriting process. Some companies do this electronically, while others manually review each application. Your application is the biggest influence on time your underwriting will take, no matter the company's process. The more complete and accurate your application, the faster it can be processed. 
  3. Decision — You'll receive a decision once underwriting is complete. You'll either be denied, approved, or approved “other than applied”. Polices approved other than applied are approved at different terms than you applied for. For example, a higher rate or lower benefit amount. 
  4. Acceptance — You'll need to formally accept your approval or approval other than applied. You'll need to sign an acceptance document agreeing to the terms of your new policy. You can often sign this document electronically for faster processing. 
  5.  Collateral Assignment — Once your policy is finalized, you'll need to have collateral assignment documents sent to your lender. This can take anywhere from a day to a week. Working with an experienced life insurance agent can expedite the process for you

Tips for Avoiding Delays When Getting Life Insurance for an SBA Loan

You'll want to receive the funds from your SBA loan as soon as possible once you've been approved. So you'll want to make sure to avoid delays getting your life insurance. While there isn't any way to guarantee you won't hit snags, here are a few things you can do to speed up the process. 

Look into Policies That Don't Require Exams

Some life insurance policies don't require an exam. If you can qualify for this type of policy, you can shave days or even weeks off of your application process. When you need a medical exam, you'll need to find time in your schedule for the exam. Even after you do, it may take days for the life insurance company to receive the results. You can avoid these delays by selecting a policy with no exam required.

Work with a Life Insurance Agent

A life insurance agent can help you get things done a lot faster. One of the first things an agent will want to know is your reason for purchasing a policy. You can talk to your agent about your SBA loan, and you can make sure they have experience with collateral assignments. Make sure you tell them the closing date of your loan, so they know what deadline they're working with. An experienced agent can help you through the whole process, from applying online to receiving all your forms digitally. This can cut weeks off the process.

Consider a Life Insurance Broker

When you work with an agent who only works from one company, you'll be limited to the products that the company sells. Working with a broker who can put you in contact with several companies can provide you with multiple solutions. This can be a big help, especially if you're having trouble securing a policy. 

Qualifying for a No Exam Policy

A no exam policy can save you time. Instead of undergoing the traditional medical exam during underwriting, your policy will be approved without an exam. Keep in mind that there are some rules and limits. For example, many companies will want you to be a specific age range with no health concerns. Additionally, many policies without an exam will have limits on how much coverage you can buy.

Since you'll need your coverage amount to act as collateral for your loan, the coverage of a no exam policy might not be enough. However, you can stack policies. For example, let's say you need 700k as collateral. You might not be able to get that in one no exam policy. Instead, you could get one 300k policy and one 400k policy. By requesting coverage amounts that are below the maxim limits, you can speed up the underwriting process. So even though you're applying for two policies, this route could still save you a lot of time. 

Recommended No Exam Companies

Several companies offer no exam policies, and it's important to find the company that best fits your individual needs. The companies below are a great place to start looking: 

Sagicor —  Offers 10, 15, or 20-year term policies of up to $500,000. The average turnaround time is one week. 

SBLI — Offers 10,15,20,25, or 30-year term policies of up to $500,000 to applications between 18 and 60. The average turnaround time is one to three weeks. 

Lincoln — Offers 10, 15, and 20-year term policies of up to $1,000,000 to applications under 60. Applicants under 50 can qualify for a 30-year term policy. The average turnaround time is between two and seven days. 

Other Quick Life Insurance Options

 Not everyone will qualify for a no exam policy. If you have to take an exam, these companies usually have the quickest turnaround time:

Protective Protective has a turnaround time of 21 days from the time you apply to until the day your new policy is issued.

Prudential — Prudential has taken major steps to reduce policy underwriting time by introducing Fast Track. The program allows an applicant to engage with the entire application process digitally. 

Banner — Banner has introduced an accelerated underwriting process that can help individuals be insured in a matter of weeks. 

Is the bank the beneficiary? 

The beneficiary of a life insurance policy is the person designated to receive the policy payout in the event of the policyholder's death. This might seem like the same thing as a collateral assignment, but it's not. Your SBA lender isn't the beneficiary of your policy. Instead, the bank issuing your loan has been assigned the proceeds of your policy, up to any balance you have left to pay off. 

Your beneficiary should be assigned just like with any other life insurance policy. Whoever you would list on a personal policy should be listed on a policy you take out for SBA loan purposes. So how does this work? Let's look at an example.

Let's say you took out a $500,000 SBA loan with a 10-year term and you took out a life insurance policy with a $500,00 payout amount as collateral. If you were to pass away after five years of payments on your SBA loan, the amount of your life insurance payout would be more than the amount you still owed your lender. In this case, your lender would receive the money you still owed them through the collateral assignment. All the remaining money in your life insurance policy would go to your beneficiary. 

Can I use an Existing Policy?

 The SBA allows you to use existing life insurance policies as collateral. Your existing policy will need to be enough to cover the full SBA loan amount for it to be accepted as collateral. However, this isn't always the best idea. If you already have a policy, you likely bought it to protect your family. If they'll need the full amount of money in your policy, using it as collateral for an SBA loan could cause a financial crisis. You'll need to look at your budget and savings carefully before using your existing personal policy as collateral. Often, it's best to apply for a new policy, even if your current one meets the SBA's requirements. 

Recap

Getting your life insurance policy quickly can help you close your SBA loans and get your funds. Providing this collateral assignment to your lender is the final step in getting your loan. You can take steps to get your policy faster and finalize your loan. 

To speed up the process, we recommend that you contact an experienced insurance agent who can help you procure a collateral assignment. Reinforce your closing date with your agent to ensure all documents can be provided promptly. If you're ready to talk to an agent, or just want more information, give us a call at 888-407-0714 today. We can help you secure the policy you need to get your SBA funds.