SBA 7(a) Q&A
Short answer
A collateral assignment grants the lender a security interest in the policy's death benefit, giving them the right to collect up to the outstanding loan balance if the insured dies.
This legal agreement allows the lender to be repaid from the death benefit before any other beneficiaries, up to the amount of the outstanding debt. It essentially pledges the policy as collateral, ensuring that the loan has an additional layer of protection, particularly if other business assets are insufficient.
A borrower takes out a $500,000 business loan. A $500,000 life insurance policy is collateral assigned to the lender. If the borrower dies with $300,000 remaining on the loan, the lender receives $300,000 from the death benefit, and the remaining $200,000 goes to the policy's primary beneficiary.
Last reviewed 2026-06-15 · SBA sources checked through 2026-06-15. DealRoom analysis of business life-insurance and SBA collateral-insurance practice (SOP 50 10 8). Not insurance, legal, or tax advice. 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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