SBA loans are structured to benefit the buyer. You come in with a lower down payment, and because the government guarantees a portion of the loan, more lenders are willing to finance highly leveraged deals that a conventional bank would turn down.
That same leverage means the lender is carrying more risk. Life insurance is one of the ways that exposure gets covered. If something happens to the person running the business, the lender has something to fall back on, and so does the business.
Expect a policy on the primary borrower, and on each owner in some multi-owner deals. Every lender approaches it a little differently, which is why we get the requirement from yours directly rather than guessing at it.
The policy covers the lender in case there’s a serious event affecting the borrower. The lender is named on the policy, and if a claim is ever made, the lender and the insurance carrier work out how the clause applies. Your agent sets it up correctly at the outset so the lender’s closer accepts it the first time.
In most cases a life policy requires a medical exam, and that exam is what slows things down. There are also situations where a borrower would be declined based on the exam, and in those cases we can look at non-medical policies instead.
This is why we start as soon as the term sheet is issued. Get the policy underway early and closing becomes confirmation rather than a scramble.
Non-medical policies exist and solve most of these cases, but not all of them. This is why it matters to talk to your insurance agent up front, so they know everything that has to be worked through on the lender’s side before it becomes a problem at closing.
The earlier we begin, the less it matters what your closing date is.
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