When the Assignment of an Existing Life Insurance Policy within an SBA Loan May Be Inappropriate

October 6, 2025

Ben Koplan
CLU, CFP®, LifeEase

When the Assignment of an Existing Life Insurance Policy within an SBA Loan May Be Inappropriate

We were recently made aware of a situation where a borrower had collaterally assigned a personally held $1,000,000 life insurance policy to his lender to satisfy a condition of his business loan. Just a few weeks later he was killed in a car accident. Per the terms of the assignment, the insurance company paid the lender $700,000 (the balance of the loan) and the borrower’s spouse as beneficiary received the remaining $300,000. Needless to say, the family of the borrower/insured was extremely upset. Instead of receiving the cash she needed to remain in their home and raise their children, the widow found herself in a financially distressed scenario where the choices were slim. She was put in a position where she had to sell their home, rent an apartment, get a job, and significantly scale back her children’s college plans.

A collateral assignment remains a valuable financial tool, often enabling loans that would otherwise not be approved, and courts have repeatedly upheld the rights of policyowners to pledge policy proceeds. However, recent updates to SBA guidelines make it even more important to ensure the assignment is appropriate for the borrower’s broader financial picture. As of June 1, 2025, SBA lenders require life insurance with a collateral assignment when a loan is not fully secured and the business depends on one or more principal owners for its ongoing viability (such as sole proprietorships, single-member LLCs, or businesses reliant on a single active owner). In these cases, the required coverage amount must at least equal the collateral shortfall. Each policy must be collaterally assigned to the SBA lender and remain in force for the term of the loan, consistent with the SBA’s standard operating procedures.

It’s crucial to recognize that not all life insurance policies qualify for this purpose. Group life insurance provided through an employer typically cannot be assigned; such plans are owned by the employer and are not portable if employment ends, which means lenders and SBA underwriters generally reject them as collateral. Similarly, personal term policies are only acceptable if enough years remain on the term to match or exceed the loan period. If an SBA loan is set to be repaid over ten years and the assigned policy

lapses before then, the assignment will not satisfy lender requirements. Some older or more restricted term policies may even prohibit collateral assignments altogether, so consultation with a qualified agent or the issuing insurer is essential to verify eligibility.

Borrowers sometimes choose to assign existing personal insurance because they believe it is faster or more cost-effective than purchasing new coverage. While these assumptions were once common, advances in underwriting technology over the past several years allow many carriers to issue SBA-compliant policies in a matter of days, often at highly competitive rates. For example, as of 2025, a healthy 45-year-old can secure $500,000 of 10-year term life insurance for less than $30 a month. This makes it a better decision for families to maintain their original protection and to dedicate new coverage specifically for the SBA requirement.

Summary

Where a borrower gets life insurance is ultimately a personal decision. However, with stringent 2025 compliance requirements and the risk of funding delays, lenders and borrowers are best served by SBA-focused insurance providers that offer digital tools, regulatory expertise, and end-to-end process management. Consider a modernized, specialized provider—like LifeEase—for a seamless collateral assignment experience and timely business funding.

For additional information please contact:
LifeEase Business Insurance Solutions

Ryan Goodson, CLU, Managing Director
Email: ryan@lifeease.com
Direct: (805) 246-9248
Mobile: (813) 924-0479
Learn More: lifeease.com
Meet: https://meetings.hubspot.com/ryan-goodson

Ben Koplan, CLU, CFP®
Email: ben@lifeease.com
Direct: (805) 246-9240
Cell: (818) 903-2790
Learn More: lifeease.com

Disclosure: LifeEase benefits from the sale of life insurance products. That said, we are
passionate about the appropriate and proper use of such products and maintain a
commitment of the highest ethical standard to always put the lender and borrower/policy
owner in the best position possible to succeed.