For SBA lenders
Short answer
Life insurance on key principals is required if their death would cause substantial financial hardship to the business, and the lender must obtain an assignment of the policy for the loan amount.
If the success of the business is dependent on an individual, the SBA requires the lender to obtain an assignment of life insurance on that individual for the benefit of the lender in an amount sufficient to collateralize the SBA loan. The policy must be in force, and the assignment must be properly executed, often requiring the SBA as the loss payee on the guaranteed portion.
A small consulting firm with a $300,000 7(a) loan is entirely dependent on the founder's expertise. The lender requires a $300,000 life insurance policy on the founder, with the lender as beneficiary and assignee.
Insider move
Lenders must ensure the correct amount of coverage, proper assignment to protect their interest, and confirm the policy remains in force throughout the loan term. Failure to maintain or properly assign life insurance can be a servicing violation.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Standard 7(a) Authorization File Library
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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