SBA rules · SOP 50 10 8.1
Does an SBA loan require life insurance?
Life insurance is required for 504 loans and larger 7(a) loans if the loan is not fully secured and the business depends on one owner's active participation; otherwise, lenders follow their internal commercial loan policy.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Standard 7(a), EWCP, CAPLines, and IT loans: Lenders may follow their internal policy for similarly-sized non-SBA commercial loans, but life insurance is mandatory in the amount of the collateral shortfall for principals of sole proprietorships, single member LLCs, or businesses otherwise dependent on one owner's active participation.
- 7(a) Small, SBA Express, and Export Express: Lenders are not subject to a mandatory shortfall requirement and may follow their internal written policy for similarly-sized, non-SBA guaranteed commercial loans.
- 504 loans: CDCs must assess whether the viability of the business is tied to an individual or individuals, and life insurance is required for principals of sole proprietorships, single member LLCs, or businesses otherwise dependent on one owner's active participation when the loan is not fully collateralized.
- 504 policy amounts and terms: For 504 loans, the required coverage equals the difference between the net debenture amount and the value of discounted collateral, with a minimum policy term of 10 years for a 10-year debenture and 20 years for a 20- or 25-year debenture.
- Assignments and uninsurable principals: For both programs, any required policy must include a collateral assignment acknowledged by the insurer's home office, and if the lender or CDC determines the principal is uninsurable, written documentation from a licensed insurer must be obtained.
The source
What the SOP says
“For Standard 7(a), EWCP, CAPLines, International Trade loans and pilot programs (unless specified otherwise in the pilot program guide), 7(a) Lenders may follow their internal policy for similarly-sized non-SBA guaranteed commercial loans. If the loan is not fully secured, life insurance is required in the amount of the collateral shortfall for the principals of sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner’s active participation.
“For 7(a) Small Loans, SBA Express and Export Express loans, SBA Lenders may follow their internal written policy for their similarly-sized, non-SBA guaranteed commercial loans.
“CDCs must assess whether the viability of the business is tied to an individual or individuals. Life insurance is required for the principals of sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner’s active participation when the SBA Loan is not fully collateralized.
“When the loan is not fully collateralized, the amount of life insurance required is equal to the difference between the net debenture amount and the value of the discounted collateral.
“If the SBA Lender determines that the principal is uninsurable, the SBA Lender must obtain written documentation from a licensed insurer of the same.
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Related reading
This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.