Securing Life Insurance for an SBA Loan: What You Need to Know

When applying for a Small Business Administration (SBA) loan, most business owners prepare themselves for the usual requirements—credit checks, financial statements, collateral verification, and business plans. But one requirement often takes borrowers by surprise: life insurance.

For many SBA loan applicants, securing life insurance becomes a crucial part of the underwriting process. Sometimes it's mandatory, and sometimes it isn’t—but understanding when and why a lender requires it can save time, prevent loan delays, and help business owners make smarter coverage decisions.

Below is a detailed look at how life insurance fits into SBA lending, what types of policies lenders prefer, and what borrowers should expect when navigating this part of the approval process.

Why Do Banks Require Life Insurance for SBA Loans?

The purpose of life insurance in the context of an SBA loan is straightforward: it protects the lender.

An SBA loan is often secured with business assets, personal guarantees, or other forms of collateral. But if the primary owner or key person suddenly passes away, the business may not generate enough revenue to repay the loan. The lender—and even the SBA—could be left exposed.

For this reason, many lenders require a life insurance policy with the lender named as a collateral assignee. This means the lender has the legal right to collect enough from the policy’s death benefit to pay off the outstanding loan balance if the borrower dies before repayment is completed.

The SBA’s general guidelines state that:

• Life insurance is usually required when the loan depends on a specific individual whose expertise, management, or involvement is critical to business success.

• Life insurance can be optional when the loan is less dependent on one individual or when collateral sufficiently mitigates lender risk.

Ultimately, whether life insurance is required depends on:

• The type of SBA loan

• The size of the loan

• The business structure

• The borrower’s role in the company

• The lender’s internal underwriting policies

Some lenders will require it for virtually all SBA 7(a) loans over a certain dollar amount. Others only require it if the business is highly dependent on the borrower’s income or leadership.

When Life Insurance Isn’t Required

While life insurance is common, it is not universal. You may not need life insurance if:

• The loan is small and fully collateralized

• The business has multiple owners and is not dependent on one individual

• There is significant alternative collateral

• The lender determines the risk is low without the coverage

However, even when not required, some borrowers choose to secure life insurance anyway because it protects both their family and the business. If they were to pass away unexpectedly, the loan would not fall on family members or co-owners to resolve.

Types of Life Insurance Accepted for SBA Loan Requirements

Most lenders accept either:

• Term Life Insurance

• Universal Life Insurance

• (Less common but possible) Whole Life Insurance

However, the most commonly used—and usually the most practical—option for an SBA borrower is term life insurance.

Let’s break down the differences and why a lender may prefer one over another.

Term Life Insurance for SBA Loans

Term life insurance is by far the most popular choice for SBA loan requirements.

Why lenders prefer it:

• Affordable premiums

• Straightforward structure

• Coverage for a fixed period (usually 10, 15, 20, or 30 years)

• Ease of assigning the policy as collateral

Why borrowers prefer it:

• It’s the least expensive way to secure the required coverage

• It aligns closely with the loan term

• Easy to obtain quickly (important because SBA loans can be delayed without proof of coverage)

In most SBA cases, the lender simply needs a policy that lasts at least as long as the loan. So if you're taking out a 10-year SBA 7(a) loan, you would typically get a 10- or 15-year term life policy.

Universal Life Insurance (UL) for SBA Loans

Universal Life Insurance is a permanent life insurance option with:

• Lifelong coverage

• Cash value accumulation

• Flexible premiums

Why some borrowers choose UL instead:

• They want permanent death benefit protection

• They want to build cash value

• They expect to keep coverage after the loan is paid off

• They need coverage for estate planning or partnership planning

Why lenders accept it:

• It offers guaranteed coverage for the full loan period and beyond

• Cash value can add extra security

However, UL policies are significantly more expensive than term life. Many borrowers choose UL only when they already had a permanent policy in place before applying for the loan or when they have long-term objectives beyond satisfying lender requirements.

Whole Life Insurance for SBA Loans

Whole life is less common due to:

• High premiums

• More rigid structure

• Slower underwriting

But if a borrower already has an existing whole life policy with adequate coverage, lenders will accept it just like any other policy.

Collateral Assignment: The Key Step

The bank doesn’t need to be the beneficiary of your life insurance policy. Instead, they require a collateral assignment.

With a collateral assignment:

• Your family or chosen beneficiaries still receive the death benefit

• The lender is paid only what is owed on your loan

• Any remaining benefit goes to your beneficiaries

This protects the lender without removing your ability to choose your own beneficiaries.

Important: The life insurance process isn’t complete until the collateral assignment form is signed and acknowledged by the insurer. Borrowers often underestimate this step, causing unnecessary delays in loan funding.

How Much Coverage Do You Need?

The required amount typically equals:

• The total loan amount OR

• The remaining loan balance (for refinance or existing borrowers)

Example: If you’re obtaining a $750,000 SBA loan, your lender may require a $750,000 life insurance policy for the duration of the loan term.

Some lenders allow slightly less if the loan has heavy collateral. Others may require more if the business heavily depends on the borrower’s involvement.

Underwriting Considerations

Life insurance underwriting considers:

• Age

• Health history

• Occupation

• Lifestyle factors

• Tobacco use

Borrowers with health conditions may need to explore simplified issue or guaranteed issue options, although these may come with higher premiums or lower coverage limits. Starting early is crucial, because underwriting—especially for fully underwritten term policies—can take several weeks.

What If You Can’t Qualify for Traditional Life Insurance?

If a borrower cannot medically qualify, lenders may still accept:

• Simplified issue term life

• Guaranteed issue life insurance

• Accidental death policies (rarely, and only if medically underwritten options are not available)

• Key person insurance through the business

Some lenders allow temporary “bridge coverage” until underwriting is complete, depending on the carrier.

Final Thoughts

Securing life insurance for an SBA loan can seem like an unexpected hurdle, but understanding the process can make it simple and efficient. In many cases, life insurance is required because it protects the lender, the SBA, the borrower’s family, and the future of the business itself.

Whether you choose term life, universal life, or use an existing policy, the key is aligning your coverage with the duration and size of your loan—and completing the collateral assignment promptly to avoid delays.

With the right approach, life insurance becomes not just a requirement, but a smart protective measure for your business and loved ones.

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Life Insurance Disclaimer

Disclaimer: This article is for informational purposes only and is not legal, financial, or insurance advice. Life insurance needs and products vary by individual, state, and insurer. Policies may involve fees, costs, and limitations. Some policies include a cash value component that can grow over time, and certain strategies may allow for accumulation beyond basic protection. Results are not guaranteed and may vary by policy, insurer, and state. Consult a licensed insurance professional before making any life insurance decisions.

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