If you are working to secure a SBA-backed loan, chances are the lender will require a life insurance policy on your life to protect their investment.
The process to apply for life insurance, whether to protect your family or your business, is essentially the same. In the case of business loan coverage, the only difference in the application process is that there will be some loan detail questions (duration, amount, purpose, etc) required. To clarify, if you are facing a health challenge that impacts your insurability or are dealing with a very tight deadline there may be other simplified issue life insurance products, but understand that a higher cost will likely be the trade-off for traditionally underwritten coverage.
We can help answer any questions for you so you can make an informed decision. A word on the difference between beneficiary and collateral assignee, or how I usually see this process unfold:
The lender says “beneficiary” at some point in the conversation with the insured and the “insured” does what they are told and lists the lender as the beneficiary for the life insurance coverage. If the lender is listed on the application as the beneficiary you run the risk of overpaying for your loan and inadvertently penalizing your family.
Example: John owns XYZ Company and is in the process of securing a SBA Loan for his business. He is told that he needs $500,000 of life insurance. Let’s look at the difference in what happens with the life insurance proceeds 3 years later when John is tragically killed in a car accident. If the lender is listed as the sole primary beneficiary they get the entire policy proceeds REGARDLESS OF THE ACTUAL OUTSTANDING LOAN BALANCE. If the lender is instead listed as a collateral assignee they will have to show “their interest as it may appear” at the time of death (or remaining loan balance). Depending on when the death occurs relative to the outstanding loan balance, your family can lose out on significant dollars. The most commonly used scenario is to list a spouse as the primary beneficiary and to collaterally assign via a policy service transaction with the lender after coverage is placed.
I’m telling you, I have had to argue with lenders about the difference between the two scenarios….they don’t know the difference and push clients to name them as beneficiary (In my opinion, this happens out of ignorance). This is easily remedied if you work with an experienced life insurance agent that goes beyond the order taker mentality.
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