For SBA lenders
Short answer
Life insurance is required on key principals when it is "prudent lending practice," typically for loans where the death of a principal would jeopardize the business's ability to repay the loan.
While not always mandatory, life insurance is generally required for sole proprietorships, single-owner businesses, and businesses where the death of a key individual would severely impact operations and loan repayment. The policy must be assigned to the lender, with the lender as the beneficiary, for at least the outstanding balance of the loan.
A $700,000 acquisition loan for a consulting firm where the sole owner/operator generates 90% of the revenue. The lender would require a life insurance policy on the owner for at least $700,000, assigned to the lender.
Insider move
Lenders must assess the impact of a key principal's death on the business's viability and ensure adequate coverage. Verification of policy existence, assignment, and beneficiary designation is crucial.
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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