Does an SBA loan require life insurance?
Short answer
Sometimes. On Standard 7(a), CAPLines and certain other loans that are not fully secured, it is required in the amount of the shortfall. That covers sole proprietors, single member LLCs and businesses dependent on one owner. Source: SOP 50 10 8.1, Sec. A, Ch. 5, Para. C.4.
Sometimes. The answer turns on the program and on whether the loan is fully secured. SOP 50 10 8.1, Sec. A, Ch. 5, Para. C.4, sets these rules:
- Standard 7(a), Export Working Capital Program (EWCP), CAPLines, International Trade and pilot programs. Lenders may follow internal policy for similar non-SBA loans. If the loan is not fully secured, life insurance is required in the amount of the collateral shortfall. That applies to principals of sole proprietorships, single member LLCs and businesses dependent on one owner's active participation.
- 7(a) Small, SBA Express and Export Express. Lenders may follow their internal written policy for similarly sized non-SBA loans.
- 504 loans. The Certified Development Company (CDC) must assess whether the business depends on one or more individuals. Life insurance is required for the same kinds of principals when the loan is not fully collateralized.
504 amount and term
The required amount equals the net debenture minus discounted collateralProperty a lender can take and sell if a loan is not repaid. . The minimum term is 10 years for a 10-year debenture and 20 years for a 20- or 25-year debenture (Para. C.4.e).
If you cannot get coverage
If the lender determines the principal is uninsurable, it must obtain written documentation from a licensed insurer (Para. C.4.a). The SOP does not say that documentation by itself removes the requirement, so ask your lender how it treats the case.
What the lender must write down
On a Standard 7(a) loan, the credit memorandum must say who is insured and for how much. If life insurance will not be required, the memorandum must justify that choice (Sec. B, Ch. 1, Para. C.2.a).
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