For SBA lenders
Short answer
The lender should be named as the assignee or loss payee on the life insurance policy, and the policy should be sufficient to cover the outstanding balance of the loan, or at least the guaranteed portion, to protect the lender's interest.
When life insurance is required, the lender's interest must be protected by assignment of the policy or by naming the lender as the loss payee. This ensures that in the event of the key principal's death, the proceeds are available to repay the loan, protecting the collateral position and the SBA guaranty.
For a $750,000 7(a) loan to a sole proprietor, the lender requires a $750,000 decreasing term life insurance policy. The policy names the lender as the primary assignee, ensuring that upon the borrower's death, the lender receives the proceeds to satisfy the outstanding loan balance.
Insider move
Proper assignment and beneficiary designation are crucial. Errors here could prevent the lender from collecting policy proceeds, leading to a loss for the lender and a potential issue with the SBA guaranty purchase.
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.
More on life insurance
Terms in this answer
Pre-qualify your SBA 7(a) deal
Tell us the business, the price, and where you are — we'll point you to the lenders most likely to fund a deal like yours and flag anything that trips up approval.
Free · No documents · Usually same-day