Why do lenders require life insurance when a Nevada business takes out a loan?

Lenders frequently require life insurance on key business owners or principals as a condition of a business loan. The lender's concern: if the owner-guarantor passes away during the loan repayment period, who ensures the loan is repaid? Life insurance answers that question.

The mechanics: the lender may require the business owner to assign the policy's death benefit to the lender (up to the outstanding loan balance) as collateral. If the owner passes away, the lender receives the assigned death benefit amount — repaying the loan — and any remaining benefit above the loan balance goes to the original beneficiaries.

SBA loans: the Small Business Administration (SBA) regularly requires life insurance on key owners as part of 7(a) and 504 loan programs. The required amount typically equals the outstanding loan balance.

Collateral assignment: the appropriate structure is a collateral assignment, not naming the lender as primary beneficiary. With a collateral assignment, the lender has a secured claim up to the loan balance, but the owner retains ownership and control of the policy.

Nevada business owners applying for SBA loans or commercial credit should plan to establish life insurance before the loan closes — lenders may delay or decline funding without evidence of coverage. Agents in our network can help facilitate coverage from A-rated (A.M. Best) carriers and execute the collateral assignment documentation required by lenders. Actual lender requirements vary.