Life Insurance to Secure a Small Business Loan
Did you know that if you want a small business loan, you’ll almost certainly need to get life insurance?
The connection isn’t obvious, and many business loan applicants don’t realize the insurance requirement exists until it’s almost too late.
Why Life Insurance?
Lenders want to be sure their loan will be paid back in the event of your death. They do that by having you buy life insurance that assigns the death benefit to them. But loan applicants, in their scramble to form a business plan and arrange financing, typically fail to notice the life-insurance requirement until closing time is around the corner.
“When they come to me, they usually need insurance right away,” said Gerry Scholz, True Blue’s national marketing director and an agent with over 20 years’ experience. “It’s the last peg in the board that’s needed, and when they’re a month from closing, it becomes a real challenge, especially if it’s a large loan.”
Term Life Insurance for the Healthy
If you’re healthy, getting the insurance is usually no problem. It’s time that’s the problem.
To solve it, you need an agent who knows the market and can quickly decide which companies to turn to in order to fulfil the requirements of a particular lender.
The amount of insurance required depends on the lender, as well as the size of the loan. Some loans require a matching amount of insurance. Small Business Administration (SBA) loans are subject to negotiation on this point.
Perhaps one reason business owners are surprised by the life insurance requirement is that SBA loans are already guaranteed by the federal government. Nevertheless, lenders often require life insurance as an additional protection.
As lending requirements have become more strict over the past couple of years, obtaining life insurance for a loan over $250,000 has gotten more challenging, Alper said. But if you’re healthy, it can be done.
Healthy loan applicants usually choose no-medical-exam insurance because getting it is much faster.
Policies vary considerably in the amount of coverage they provide and the time it takes take to issue them.
The highest amount of no-medical-exam life insurance you can get is $399,000. It’s available through Sagicor, which can issue a policy in 24 hours. Life of the Southwest offers policies of up to $350,000 within 24 hours, but its policies are only available in 30 states. Assurity offers $350,000 in coverage for every state except New York, but its underwriting time is longer. Fidelity and American National can provide up to $250,000 of coverage and issue a policy in a week.
If one policy does not offer enough coverage, lenders allow you to combine it with others.
“If you can qualify for a $1.1 million loan, you can qualify for $1.1 million of life insurance,” Scholz said.
There’s one more important factor. After your policy is issued, you still need to make an assignment to the lender, which takes three to seven business days. Scholz budgets for this in advance, notifies clients as soon as their policy is issued, has them fill out the lender’s assignment form, and returns it to the lender the same day. Don’t forget about this form—it’s a factor some agents neglect in calculating the timeline for closing a loan.
As long as you meet the deadlines, getting life insurance to close a small business loan is pretty simple—if you’re in good health.
Term Life Insurance for the Not-So-Healthy
But what if you have a serious medical condition like high blood pressure, diabetes, or heart problems?
It’s tougher and more expensive, but still possible to get the coverage you need.
“Unless you’re waiting for a heart transplant or a quadruple bypass, we can get you $100,000 of coverage. It’s possible to get $250,000. It’s not cheap, but we can do it,” Scholz said.
For all the years he’s been in the business, Scholz has never had to turn away a client because he couldn’t get them the coverage they needed.
“The first thing we do is ascertain the person’s health. Then we identify the companies that offer as much coverage as possible,” Scholz said.
It’s part juggling act and part jigsaw puzzle, involving multiple policies, requirements, and deadlines.
Recently, Scholz helped a business partnership of three men, each of whom needed a policy of $300,000 for a loan to remodel their business. Two were healthy, but the third man had untreatable high blood pressure and a history of hospitalization for it.
To make matters worse, by the time they called Scholz, they were just two weeks away from the closing deadline.
In a week’s time, Scholz was able to get one policy for the first man, a combination of two policies for the second, and three policies for the man with health issues—and get the all the assignments to the bank in time for the closing.
To help another client who had serious health problems and needed a construction loan, Scholz arranged for the man’s family members to pledge collateral for part of the loan to lessen the amount of life insurance needed for the rest.
“It’s a matter of knowing the client’s health situation, identifying the companies that will work for them, keeping an eye on deadlines, and working with the client to obtain a balance of speed and cost,” Scholz said.
Changes in Medicine, Changes in Insurance
Coverage for people with serious medical conditions has changed as medicine has found ways to help people manage or even ward off problems that were once routinely considered life-threatening.
In the past, if you were taking medication for high blood pressure, high cholesterol, or diabetes, you often couldn’t get a policy. But over time, as the medications have been shown to reduce mortality, insurers have changed their tune. Being on medication alone won’t disqualify you. But if you’re on medication for more than one problem, it’s tougher and more expensive to get coverage.
In the face of increased industry competition, some insurance companies have opened their doors too wide. “They take in too many people, they don’t add enough filters, they don’t ask enough questions,” Scholz said. And then they go out of business.
Another change is the abundance of information now available on the internet. Scholz had a client who applied for a no-medical-exam policy and said he was five-foot-ten and weighed 215 pounds. But his driver’s license told a different story: five-foot-seven and 265.
“They think with a no-exam plan, they can get by,” Scholz said of such applicants. “You can’t do that in 2014.”
Honesty not only is the best policy—in this day and age, it’s the only way to get a policy.
If you need life insurance to close a small business loan, whether you’re the picture of health or have serious medical problems, True Blue can help. Honesty is our policy too, and that’s why we share information about specific companies and policies that you won’t find on other sites.