For SBA lenders
Short answer
Life insurance is generally required for key principals whose absence would jeopardize the business's repayment ability, regardless of ownership percentage, if the loan amount cannot be otherwise collateralized.
SBA policy states that life insurance is required for principals whose managerial ability or technical expertise is critical to the successful operation of the business, where the loan cannot be otherwise adequately secured. While typically focused on owners of 20% or more, this can extend to other key employees or principals if their death would severely impact the business's ability to repay the loan.
A $1M 7(a) loan is for a specialized tech startup where the lead engineer, holding 15% equity, is irreplaceable and critical to product development. The lender determines that the loss of this individual would severely threaten the business's viability and ability to repay. Therefore, life insurance on this 15% owner is required, assigned to the lender.
Insider move
Lenders must assess the impact of a key principal's loss on the business's financial health. Failure to require life insurance when a key person is essential for repayment, irrespective of ownership, could be deemed a lack of prudent lending and lead to a guaranty repair.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-14. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-14 · SBA sources checked through 2026-06-14. 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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