SBA 7(a) Q&A
Short answer
A life insurance policy is assigned as collateral to a lender through a document called a 'collateral assignment of life insurance,' which grants the lender a security interest in the policy's death benefit and cash value.
This assignment gives the lender the right to receive a portion of the death benefit, typically up to the outstanding loan balance, if the insured dies. It also often allows the lender to access the policy's cash value if the loan defaults. The borrower generally retains ownership of the policy and pays premiums.
A business owner has a $1,000,000 life insurance policy. When securing a $400,000 SBA loan, they sign a collateral assignment form. If the owner dies with a $300,000 loan balance, the lender receives $300,000 from the death benefit, and the remaining $700,000 goes to the policy's designated beneficiaries (e.g., the business or family).
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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This page answers “How is a life insurance policy assigned as collateral to a lender for a business loan?” for SBA 7(a) business buyers — a short answer, the detail, and official sources — from DealRoom.so SBA Intelligence. It is general information, not legal, tax, or financial advice, and DealRoom is not a lender.
Source: DealRoom.so SBA Intelligence, based on public SBA, lender, franchise, FDIC, and related records. DealRoom is not a lender and does not guarantee financing.
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