SBA 7(a) Q&A
Short answer
Yes, if life insurance is required as collateral, the policy must typically be a whole life or universal life policy with a cash surrender value, assigned to the lender.
Term life insurance policies, which lack a cash value, are generally not acceptable as collateral. The SBA requires a policy with a cash surrender value that can be assigned to the lender. The lender obtains a collateral assignment, allowing them to claim the cash value if needed, or proceeds upon the principal's death, up to the loan balance.
If a key principal's life insurance is required, a whole life policy with a cash value of $50,000 could be collaterally assigned to the lender. If only a term life policy is available, the lender might require the borrower to purchase a whole life policy or provide other collateral.
Insider move
Lenders need to ensure the policy has a tangible value they can access. They verify the policy type, the cash surrender value, and that the collateral assignment is properly executed and recorded with the insurance company.
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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