Can I use a life insurance policy I already own for an SBA loan?
Short answer
Yes. SBA lenders may accept the pledge of an existing policy, through a collateral assignment acknowledged by the insurer's home office. Credit life or whole life should not be required. Source: SOP 50 10 8.1, Sec. A, Ch. 5, Para. C.4.
Yes. SOP 50 10 8.1, Sec. A, Ch. 5, Para. C.4, says lenders may accept the pledge of an existing life insurance policy. The same paragraph says credit life insurance or whole life insurance should not be required.
How a policy is pledged
For each required policy, the lender must obtain a collateralProperty a lender can take and sell if a loan is not repaid. assignment. It must name the 7(a) lender as assignee, or the Certified Development Company (CDC) and SBA on a 504 loan. The insurer's home office must acknowledge it.
Who pays
The lender must ensure that the applicant or borrower pays the premiums (Para. C.4, citing 13 CFR § 120.970(c)).
Whether the policy is large enough
An existing policy works only if it covers what the loan requires. On a Standard 7(a) loan that is not fully secured, the required amount for certain principals is the collateral shortfall. On a 504 loan, the amount is the net debenture minus discounted collateral, for a minimum term of 10 or 20 years (Para. C.4.e). If your policy falls short, expect to add coverage.
7(a) Small and SBA Express
On these loans the lender may follow its internal written policy for similarly sized non-SBA loans, so requirements vary by lender (Para. C.4.d).
Ask your insurer early how its home office handles collateral assignments.
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