For SBA lenders
Short answer
Life insurance on key principals is generally required when their death would jeopardize the repayment of the loan, with the lender as the loss payee.
The SBA requires life insurance on principals whose managerial ability or technical expertise is critical to the successful operation of the business. The policy amount should be sufficient to cover the outstanding loan balance, and the lender must be named as the loss payee on the policy, or the policy must be assigned to the lender.
A sole proprietor with no clear succession plan secures a $750,000 7(a) loan. The lender requires a $750,000 life insurance policy on the proprietor, with the lender named as the collateral assignee (or loss payee), to protect against default in the event of their death.
Insider move
Lenders must identify true 'key' principals, ensure adequate coverage amount, confirm proper assignment or loss payee designation, and verify that premiums are paid to keep the policy in force. Lapse in coverage poses a significant risk to the loan's security.
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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