For SBA lenders
Short answer
A lender can require a collateral assignment of life insurance on a non-owner key employee when that individual's death would cause severe financial hardship to the business, particularly for larger loans.
Life insurance on key individuals is typically required for owners of 20% or more. However, if a non-owner key employee (e.g., a highly specialized technician, a top salesperson) is critical to the business's success and their loss would significantly jeopardize repayment ability, the lender may require a collateral assignment of life insurance on that individual. This decision must be documented under prudent lending standards.
A small software company relies heavily on its sole lead developer, a non-owner employee, for its flagship product. For a $1 million 7(a) loan, the lender, recognizing the substantial risk, requires a collateral assignment of a life insurance policy on the lead developer.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
7(a) Loan Program — Terms, Conditions, and Eligibility
U.S. Small Business Administration · Official SBA source
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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