Understanding The 504 Loan Life Insurance Requirement

Having life insurance is a requirement for some SBA 504 loans,  so it is a good idea to familiarize yourself with the rationale behind the insurance requirement.  Requiring applicants to carry life insurance to secure a Small Business Administration (SBA) 504 loan protects the SBA in case of your death. It also protects your business and family, who may otherwise feel financial repercussions.  

Why Do I Need Life Insurance with a 504 Loan?

What life insurance policies meet the 504 requirement? There is some flexibility here, and your CDC will help you decide on an individual basis whether or not it’s necessary.

Generally,  the first step will be to decide on the amount of life insurance coverage you need. The goal is to make sure your coverage is consistent with the size and term of the loan, enough to pay off the outstanding balance on your 504 loan in the event of your death. This is especially important if your business is organized as a sole proprietorship or a single-member LLC, or if the continuing existence of the business is heavily dependent on your participation.

Having life insurance is a crucial way of looking out for your employees and heirs. Since your 504 loan is collateralized by the property you obtain with it, the insurance payout protects your business from potential default and protects your heirs from losing their equity in the business. Any remaining funds from the insurance payment will go to your beneficiaries as you specify.

What Choices Do I Have for Life Insurance?

If you already have life insurance and it offers sufficient coverage, you can use it to meet the requirement. If it is term insurance, then you’ll need to renew it to make sure it continues covering the loan. If you do not already have insurance coverage, you have a few choices to make.

First, you will have to determine what kind of policy works best for you. Term insurance, which has a steady premium and lasts only for a certain period, is fine for loan purposes, as long as the term of the insurance and the term of the loan are consistent. However, you may prefer whole life insurance instead. This kind of insurance remains in effect for the length of your life, as long as you continue to pay for it.

Second, you should consider whether or not to get underwritten insurance.  Underwriting is a form of risk analysis. You will get a physical examination and answer a questionnaire, and your premium will be calculated on the basis of the data. If you are healthy, this type of insurance will be cheaper than no-exam insurance, which has a higher premium due to the unknown level of risk present. Underwriting takes time, however—sometimes weeks. Since your 504 loan cannot be funded until that policy is in force, you’ll have to gauge if more expensive insurance is worth receiving funding faster.

What Has to Be Done with My Life Insurance Policy?

All CDCs have their own procedures when processing your insurance policy. For example, TMC Financing will look at your policy number, along with the details of the coverage and contact your insurance company for additional information.

Taking out insurance is simple, and it’s a good deal all around. Not only does it get you access to the 504 loan with its fixed, below-market rates and full amortization. It also benefits your family and your business. You can find out more about how to obtain a 504 loan from one of TMC Financing’s 504 loan experts. We work to get you the best financing conditions possible and will be your advocates for the full life of the loan.

TMC is an SBA Premier Certified Lender, and has funded projects worth more than $9 billion across California and Nevada, resulting in the creation of an estimated 60,000 jobs. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.


Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison