For SBA lenders
Short answer
Collateral assignment of life insurance is generally required for principals whose death would cause a substantial adverse impact on the business's ability to repay the loan, especially for key persons or single owner-operators.
The SBA requires life insurance on the lives of principals when their death would create a significant financial hardship for the business, impacting loan repayment. This is a prudent lending practice to mitigate risk. The policy is collaterally assigned to the lender, ensuring funds are available to repay the loan if the key person passes away.
A sole proprietor operating a profitable consulting firm seeks a $400,000 7(a) loan. The lender would require collateral assignment of a life insurance policy on the proprietor's life for at least the loan amount, as their death would severely impact the business's revenue generation.
Insider move
Lenders must assess the impact of a principal's death on the business's viability and debt service. Properly sizing the policy, ensuring it's in force, and perfecting the collateral assignment are critical. Failure to obtain required life insurance can be a basis for a guaranty repair or denial.
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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