Before approving an SBA loan, most banks will request for a life insurance policy. A lot of people are caught off-guard by this, and most people don’t know why they need a life insurance policy for their SBA loans. As a result, most people end up buying insurance policies that may not be important to them, just to fulfill the requirement. Just as the insurance policy is important to the bank, it is also important to you. There are many reasons why you need it and here are some of the most common ones;
It’s the bank’s collateral
One of the main reasons you need a life insurance policy may not be for your own benefit, but for the benefit of the bank or your lending institution. You will need the insurance policy for your SBA loan because it acts as collateral for your loan if you die before the debt is fully paid. Lending institutions and banks need assurance that they will not incur losses from unpaid debts even when the borrower dies, that is why life insurance is needed for collateral.
Before your loan is approved, you will need to set up a collateral assignment.
The collateral assignment is conditional in that, if you die before fully paying the loan back, the bank will receive proceeds from your life insurance policy until it is fully repaid. In the collateral assignment form, you need to provide a beneficiary, who will receive the remaining insurance proceeds after the bank is fully paid back. With a beneficiary, the bank will not be able to claim more than you owe it.
To save your beneficiaries the debt burden
You may also need a life insurance policy for SBA loan to save your beneficiaries from a financial debt burden when you die. Your family or beneficiaries will bear the debt burden if there is a loan balance after your demise. The best way to relieve them of this possible financial burden is to secure a life insurance policy for your SBA loan.
Also, the life insurance proceeds may not necessarily go to the bank if you had fully paid off your debt at the time of your death, they are given to your beneficiaries. This way, instead of paying off your uncleared debt, your beneficiaries get the remaining proceeds of the insurance policy.
It equals peace of mind
Buying a life insurance policy will give you the peace of mind you need. When acquiring an SBA loan, whether your business flourishes or not, you want to be certain that you will be able to pay the loan back. Businesses sometimes fail, but even if that happens to you, the last thing you will want to avoid is taking a plunge into debt.
A failed business and an unpaid debt can be stressful, but a failed business and a fully paid debt will give you some kind of relief from stress.
Also, you will be certain that no one will bear your financial burden for you, and even if you die before completing payment for the loan, the insurance policy will have it covered. So, no matter what happens the debt will be paid off.
The life insurance policy for an SBA loan may not benefit you directly but will in one way or another be necessary. It allows you to honor your debt with the bank even after your demise and lifts off possible future debt burdens for your beneficiaries. A life insurance policy will help you avoid getting into debt or transferring it to your loved ones after your demise.