Life insurance is required for the principals of sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner's active participation when the SBA Loan is not fully collateralized.
If a company has such a person, the SBA requires a collateral assignment of life insurance on the life of the business owner as additional collateral for the loan. Life insurance may be waived if there is strong transition plan in place with a person who can operate the business or if there is sufficient collateral to cover the loan.
The amount of life insurance required will never be more than the original amount of the SBA loan, and in most cases it may be less, depending on the value of the collateral. We may also accept the pledge of an existing life insurance policy as long as there are sufficient proceeds available. The term of the life insurance must be at least the term of the SBA Loan.*
When life insurance is required, it is important that the key person start the assignment process soon after the SBA Loan Authorization is issued, as it may take a minimum of 45 to 60 days to receive the acknowledged collateral assignment from the home office of the life insurance company. Starting this process sooner rather than later will help eliminate delays when closing the loan.
*25-year SBA terms only require a 20-year term life insurance term.