For SBA lenders
Short answer
A lender ensures proper collateral assignment of life insurance by obtaining a completed Collateral Assignment of Life Insurance form for each key principal, verifying policy ownership and beneficiary designations, and confirming sufficient coverage to amortize the loan, with the lender designated as the first collateral assignee.
Life insurance on key principals protects the lender and SBA against the risk of the principal's death, which could jeopardize the business's ability to repay the loan. Proper assignment means the lender has a perfected security interest in the policy's death benefit or cash value, ensuring funds are available to cover the loan balance. Each policy must be assigned separately.
For a $1 million 7(a) loan with two key principals, the lender requires each to obtain a $500,000 life insurance policy. For each policy, the lender completes a Collateral Assignment form, sends it to the insurer, and obtains confirmation that the lender is irrevocably designated as the first collateral assignee up to the loan's outstanding balance.
Insider move
Lenders are concerned about ensuring the policies are in force, the assignments are properly perfected, and the coverage is adequate. Errors in assignment, lapsed policies, or insufficient coverage can leave the loan exposed and lead to a repair of the SBA guaranty.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
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