The Role of Life Insurance Under SOP 50 10 8 for SBA 504 Loans
October 27, 2025
by Ryan Goodson
CLU, Managing Director, LifeEase
The Role of Life Insurance Under SOP 50 10 8 for SBA 504 Loans
Executive Summary
With the implementation of SOP 50 10 8, effective June 1, 2025, the Small Business Administration (SBA) has refined life insurance requirements critical to the SBA 504 loan program. This paper clarifies when life insurance is required, how coverage must be calculated in relation to collateral, and outlines recommended practices for maintaining compliance and streamlining loan closings.
When Life Insurance Is Required
Certified Development Companies (CDCs) are responsible for assessing whether the viability of a business depends on one or more principals. Life insurance is mandatory in the following cases:
- Sole proprietorships
- Single-member LLCs
- Businesses where repayment depends on the active participation of one key owner
If the SBA loan is not fully collateralized, life insurance is required to mitigate risk. In cases where a principal is uninsurable, the CDC must obtain written confirmation from a licensed insurer verifying uninsurability.
Policy and Collateral Assignment Requirements
Policies must include a collateral assignment naming the CDC and SBA as assignees, acknowledged by the insurer’s home office.
- Existing policies may be pledged if coverage amounts, duration, and assignment terms meet SBA standards.
- Whole life and credit life insurance should not be required by the CDC under current guidance.
This ensures the SBA’s security interest is properly documented and enforceable in the event of a claim.
Coverage Calculation and Collateral Discounting
The required life insurance amount must equal the difference between the net debenture amount and the discounted collateral value.
Collateral Discount Percentages
- Improved real estate: 85% of fair market value (per SBA appraisal)
- New machinery and equipment: 75% of purchase price minus outstanding liens
- Used machinery and equipment: 50% of net book value, or 80% if an Orderly Liquidation Appraisal has been performed, minus liens
- Furniture and fixtures are excluded from collateral discounting for insurance calculation purposes.
Example
Loan amount: $2,500,000
Collateral: $2,000,000 improved real estate and $400,000 new equipment
Discounted collateral value:
(2,000,000 × 0.85) + (400,000 × 0.75) = 1,700,000 + 300,000 = 2,000,000
Thus, the borrower must carry $500,000 in life insurance coverage assigned to the CDC/SBA.
Term Requirements
Life insurance term duration must align with the loan maturity structure:
- Minimum of 10 years for 10-year debentures
- Minimum of 20 years for 20- or 25-year debentures
Borrowers are responsible for maintaining premium payments and ensuring continuous coverage for the
required term.
Implementation Tips
Life insurance often represents a significant cause of closing delays during SBA loan processing. CDCs
and lenders can minimize disruption through proactive engagement:
- Discuss insurance needs during early underwriting.
- Partner with expedited life insurance providers offering digital platforms for quick turnaround.
- Utilize solutions like LifeEase, which provide electronic applications, immediate collateral assignments, and connectivity to multiple carriers for faster approval cycles.
By integrating early assessment and streamlined insurance processing, lenders enhance efficiency and borrower satisfaction while maintaining SBA compliance.