For SBA lenders
Short answer
A lender must obtain an absolute assignment of the life insurance policy, confirm the policy is in force, and verify the beneficiary designation names the lender as primary beneficiary.
To properly assign life insurance as collateral, the lender requires an absolute assignment form signed by the policy owner, transferring all rights and ownership to the lender. The lender must then confirm with the insurance carrier that the policy is in force, premiums are paid, and that the lender is listed as the loss payee or beneficiary for an amount at least equal to the loan balance, or the maximum insurable amount.
For a $700,000 7(a) loan, the lender receives an absolute assignment from the borrower for a $750,000 life insurance policy. The lender then sends a notice of assignment to the insurance company and receives confirmation that the policy is active, the lender is the designated primary beneficiary, and the cash surrender value (if any) is assigned to the lender.
Insider move
Improper assignment or failure to verify policy status can render life insurance ineffective as collateral, leaving the loan exposed in the event of the principal's death. Lenders must diligently follow these steps to ensure enforceability and protection of the 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.
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