LOANOLOGY
REQUIRED INSURANCE
Securing an SBA loan for your business—whether a single location, multi-unit expansion, or rural operation—requires specific insurance policies to protect lenders and ensure compliance. Let’s break down what you need, with LoanBox’s expertise streamlining the process to get you to closing fast.
Why Insurance Is Required
Insurance policies safeguard lenders against risks, like borrower death, property damage, or liability claims, ensuring loan repayment. Requirements vary by lender, loan type (SBA vs. conventional), loan amount, and industry, but SBA loans have standardized mandates. For example, a $1 million 7(a) loan for a retail acquisition may need life insurance and hazard coverage, while a rural business may require flood insurance. Getting policies in place early avoids closing delays.
SBA vs. Conventional: SBA loans have specific requirements (e.g., life insurance for loans over $500,000), while conventional lenders may impose similar or stricter policies, like higher liability limits.
Why It Matters: Missing or non-compliant policies can delay or derail your loan, like a $500,000 Express loan for a service business.
LoanBox Tip: Our vendor portal connects you with SBA-compliant insurers, ensuring policies meet lender requirements on time.
Typical Insurance Policies Needed
For advisor borrowers, the primary insurance policies typically required are:
Life Insurance
General Liability
Errors & Omissions
Workman’s Compensation
Hazard Insurance
Life Insurance and Collateral Assignment
Most business loans will require a life insurance policy (typically known as key-man or loan guarantee coverage) to protect the lender should the borrower pass away during the term of the loan. The process of obtaining life insurance for a business loan can be a bit tricky and should not be confused with the process that is needed to obtain life insurance for other personal or business purposes. Often there is a closing deadline, which necessitates a sense of urgency for the borrower to fulfill the required documentation to the lender.
General Liability Policy
This is typically always required for business loans even though advisors already have E&O insurance.
Commercial General Liability insurance policy is required to cover bodily injury, death and property damage. Is also required by lenders for businesses and assets comparable to the property, business and collateral.
Most lenders require a combined single limit of at least $1,000,000 per occurrence and $2,000,000 in the aggregate. We have seen some conventional lenders require a $3,000,000 aggregate.
Errors & Omissions Policy
Certificate of Errors and Omissions (E&O) insurance in an amount of not less than the loan amount for protection against claims relating to the professional services provided by the Guarantors and the Borrower.
Workers’ Compensation
Workers’ Compensation Certificate of Statutory workers’ compensation insurance required for employees in connection with the advisory business.
Hazard Insurance Policy
Hazard Insurance Policy Various forms of hazard insurance and clauses may also be required. Commercial non-SBA lenders will typically have fewer requirements than with SBA loans.
SBA Requirements:
The SBA requires hazard insurance on all assets pledged as collateral.
If the borrower is located in a state that requires additional coverage including wind, hail, earthquake or other, on the hazard insurance, the borrower must provide a separate policy.
Real Estate Used as Collateral:
Coverage must be in the amount of the full replacement cost.
If full replacement cost insurance is not available, coverage must be for the maximum insurable value.
Insurance coverage must contain a Mortgage Clause (or substantial equivalent) in favor of the lender. This clause must provide that any action or failure to act by the mortgagor or owner of the insured property will not invalidate the interest of the lender.
The policy or endorsements must provide for at least ten days prior written notice to the lender of policy cancellation.
Personal Property:
Coverage must be in the amount of full replacement cost.
If full replacement cost insurance is not available, coverage must be for maximum insurable value.
Insurance coverage must contain a “Lender’s Loss Payable Clause” in favor of lender. This clause must provide that any action or failure to act by the debtor or owner of the insured property will not invalidate the interest of the lender.
The policy or endorsements must provide for at least ten days prior written notice to the lender of policy cancellation.
Flood:
SBA flood insurance requirements are based on the Standard Flood Hazard Determination (FEMA Form 086-0-32).
If any portion of a building that is collateral for the loan is located in a special flood hazard area, the lender must require Borrower to obtain flood insurance for the building.
If any Personal Property Collateral is in a building, any portion of which is located in a special flood hazard area in that building is not collateral for the loan; lender must require Borrower to obtain available flood insurance for the Personal Property Collateral.
SBA Life Insurance Requirements
SBA has their minimum requirements for insurance but mostly defer to the SBA lender’s internal policies for similar sized non-SBA loans on their commercial lending side.
SBA Loans Over $500K
Mandatory for principals of sole proprietorships, single-member LLCs, or businesses dependent on one owner’s active participation, unless the loan is fully secured (all assets pledged match the loan amount).
Amount: Matches the loan amount (e.g., $750,000 policy for a $750,000 loan) or the unsecured portion, adjusted for collateral value.
Collateral Assignment: The policy must assign proceeds to the lender to cover the outstanding loan balance upon death, with any remainder to your beneficiary. Requires:
Executed Collateral Assignment form.
Collateral Assignment Acknowledgment Letter from the insurer.
Verification of Coverage, submitted 7–10 days before closing.
Uninsurable Principals: If a principal is uninsurable, the lender must obtain written documentation from a licensed insurer.
SBA Loans Under $500K
May be waived if:
The loan is fully secured by collateral (e.g., real estate with equity equal to the loan amount).
A second lien on property covers the loan amount.
Succession or contingency plans (e.g., buy-sell agreements) ensure repayment.
Partial waivers may reduce coverage to the unsecured loan portion.
Life Insurance and Collateral Assignment
Most business loans will require a life insurance policy (typically known as key-man or loan guarantee coverage) to protect the lender should the borrower pass away during the term of the loan. The process of obtaining life insurance for a business loan can be a bit tricky and should not be confused with the process that is needed to obtain life insurance for other personal or business purposes. Often there is a closing deadline, which necessitates a sense of urgency for the borrower to fulfill the required documentation to the lender.
While other types of policies will require your attention, the life insurance policy needs your focus and should sit on top of your insurance priority list because of a few factors which can cause delay:
Not every carrier can fulfill the Lender’s life insurance requirements, whether that’s due to product limitations, underwriting guidelines, or collateral assignment issues.
Not every agent/broker can secure the Lender’s life insurance requirements in a timely manner due mainly to lack of familiarity with the loan closing process.
For these reasons (and more), it is important that borrowers engage with an insurance agent/broker who is well-versed in the nuances of obtaining life insurance quickly and compliantly in order to mitigate the risk that this important requirement will cause a delay for closing.
The amount of life insurance typically matches the amount of the loan, and in some cases may be less. Borrowers will ultimately need to obtain the following documents, which lenders will typically require on file and in good order 7-10 days in advance of closing:
Life Insurance Policy
Executed/Recorded Collateral Assignment
Life Insurance Collateral Assignment Acknowledgment Letter
Verification of Coverage
LoanBox Loanology provides independent insights into small business lending based on what we know can be accomplished with most LoanBox lenders. However, there may be some policy, perspective, or viewpoint we share which may not reflect those of all lenders on our platform, as each brings unique policies. LoanBox lenders brings diverse policies and perspectives so not all lenders will be able to assist or even agree with all of the tips, strategies, articles, guides, and insights we provide for small business owner borrowers. Lenders are not responsible, liable or obligated for the content or advice provided in Loanology or on LoanBox.com. For specific guidance, use the search bar or just contact us directly and speak to a LoanBox Advisor.