LIfe Insurance and SBA Loans

As more loans are moving forward one of the conditions that have been implemented by some lenders are now becoming the norm rather than the exception. One of those new requirements that are being strictly looked at today is that of having life insurance on the primary borrower in the amount of the loan. In the event of the death of the primary owner of the business the life insurance will pay off the loan, so that the beneficiaries are not subject to the debt of the business which they may not be familiar running.

Clearly you can see that this is a protection that is for the banks benefit and not the beneficiaries. The bank wants to make sure that their loan is paid off. From the banks perspective they made the loan to one individual and that is the person that they are planning to get repayments from over the life of the loan. With the death of the borrower there is always the possibility that the loan would not be repaid as the income stream may dry up without the owner.

Below you see two of the requirements from a lenders checklist, one the amount of life insurance policies in force. The amount must be equal to or greater than the loan amount. Second the Assignment of the insurance must be acknowledged by the Insurance Company for it to take effect. I also have seen that the initial beneficiaries may have to sign off on the change of beneficiary to the bank.

Life Insurance Policies (pages showing insured and amount)

Collateral Assignment of Life Insurance Policy (acknowledged by Insurance Company.

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