For SBA lenders
Short answer
To properly collateralize life insurance, lenders require a collateral assignment form executed by the policy owner and the insured, naming the lender as the primary assignee, and confirmation from the insurer.
SBA requires key principals to carry life insurance assigned to the lender to cover the outstanding balance of the loan, especially for loans where the death of a key individual would severely impact the business. The collateral assignment ensures that in the event of death, the policy proceeds are used to repay the loan. The lender must ensure the policy is sufficient and premiums are paid.
For a key principal on a $500,000 7(a) loan, the lender would obtain a Collateral Assignment of Life Insurance form, signed by the principal, and send it to the insurance company for their acknowledgement and recording. The policy should have a death benefit at least equal to the loan amount.
Insider move
Lenders must ensure that life insurance collateral assignments are correctly executed and recorded with the insurance carrier to be enforceable. Failure to properly perfect this collateral can lead to a loss of security and potentially a guaranty repair in the event of the principal's death.
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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