It seems that very few business owners realize that applying for an SBA or business loan often requires that a life insurance be in place before the loan can be approved. Once that need is recognized, the process can either be fast and painless or grueling and, at times, even impossible. We hope some of the tips below will help you avoid potential mistakes business owners make in the process of applying for the needed life insurance.
First thing first, what plan do you need? Most lenders only require that you get a 10 year term life insurance plan. Meaning that the insurance only has to have rates guaranteed for 10 years (as opposed to 15, 20 or 30 years) and does not need to be convertible. Premium wise, that is a good thing as a ten year term is cheaper than the longer plans or a whole life.
Some may wonder if they should use their present life insurance as collateral for their SBA loan or business loan. Although the lender may not care if you do that, your beneficiaries may not feel the same way. Keep in mind that, if you decide to collateralize your present insurance policy, the lender has full control of the policy and becomes the first to decide what happens to the money paid if you die. Rather, we do recommend that you take out a policy specifically for your business loan. Besides, if you do get a life insurance policy specifically for the loan, you may be able to claim the policy as a business expense on your taxe return (consult your accountant to make sure).
Once you decide to apply for a loan specific life insurance policy, which way should you go, exam or no exam? That question really depends on many factors. Primarily, you need to consider your present or past health history. If you are in great health, then many options are open to you. If you do have some minor or major health issues, then the process may or may not be more complicated. Keep in mind that, when your health is not 100% or close to it, the process of underwriting may take on average 6 weeks (as long as 4+ months sometimes). You may wonder why it takes so long. Well, more often than not, the insurance company will request medical records. And needed medical records can bring everything to a halt. Most medical offices are not in a hurry to process the medical record request and if your Dr. is not in a hurry to send the insurance company your medical records, then underwriting cannot proceed. That is besides the fact that the Dr’s office has just been paid as much as $300+ for your records. Now, there may be ways to accelerate the process. And if you do have medical issues and need the life insurance coverage fast, we highly recommend that you select an insurance consultant that has the needed experience to get things done as fast as possible.
What if you have no medical issues? It would seem that, if you are healthy, the response should be very fast and the rates very low. Well, that is a possibility but not always the case. Remember, if you want some of the lowest insurance rates available, you still need to get a medical exam. We strongly do not recommend that you follow the exam route. Why? Simply because we have seen instances where a healthy, young individual took the exam only to find out that he had a medical issue. The problem was not necessary that he ended up getting higher rates. The problem was that he was declined! Once declined by an insurance company that requested an exam, getting a policy somewhere else (and fast) becomes extremely difficult. When we spoke to his wife, we told her that it was not his fault but he had followed the wrong process. What else should he have done? When you have to cover a business loan or SBA loan, you need the coverage ASAP and with as little risk of decline as possible. What we recommend is that you first secure a NO Exam Life insurance for the amount needed for the loan. I know rates can be higher and amounts available can be lower (some companies only offer up to $250,000 without an exam) but that is still the best way to get what you need fast and with less risk of a decline. By the way, it is possible to get as much as $1,000,000+ in no exam life insurance by using multiple companies. We have never seen that it is a problem. The insurance companies just need to know what you are doing.
How about the assignment? That is or should be the easiest part. If you are working with an insurance consultant who is familiar with assignment forms then he/she should know what questions to ask the lender and the insurance company and coordinate the right forms to the lender. You may still need to get involved to make sure that the lender has received the right forms as, at times, the lender will only want to work with you and not the lief insurance consultant.
Your loan is now approved, the life insurance is in place and all assignment forms have been processed. Now you can breath again and start working on what is really important to you – YOUR BUSINESS! What can possibly be next. Well, if you are like most people, you will want to see if you can get rid of the more expensive no exam life insurance plan(s) and get lower rates with a new policy. Less worry and no hurry usually means better rates. At this point, and when you can, we recommend that you re-shop the no exam life insurance plan you secured for your business loan or SBA Loan and, if needed, do a new SBA Loan life insurance plan that requires an exam. Once you have secured new, lower priced life insurance, you should be able to easily cancel the old (higher priced) policy(ies) and assign the new policy to the lender. Of course, If you originally secured a life policy with an exam and received very low rates, then you are all set and no need to re-shop. If you secured the life insurance policy with an exam but your health was not so great, and the rates you received seemed high, then we suggest that you re-shop the insurance plan about once every 18 months. With impaired health life insurance many factors can influence future premium changes and I would not want you to miss out on potential savings. I could get into more details on impaired health life insurance but that is for another article.
To recap, when you apply for your business or SBA Loan, make sure to ask if a life insurance policy will be needed. The point is, the sooner you start looking, the better. Next, apply for a no exam life insurance. Then, get all assignment forms in place. Last, once the loan is all set, re-shop for your life insurance as needed.