It’s a life insurance policy used to protect a business loan. The policy owner (usually the business or owner) assigns part of the death benefit to the lender. If the insured dies before the loan is paid, the lender is repaid up to the outstanding balance and any remaining proceeds go to your named beneficiary.

Many lenders—especially SBA lenders—often require life insurance on owners who are critical to repayment. The exact requirement depends on the loan type, loan size, and lender policy. Your approval terms usually specify whether a collateral assignment is needed.

After your policy is issued, you and the lender sign a collateral assignment form. The insurer records the assignment. At claim time, the insurer sends the outstanding loan balance to the lender first; the remainder is paid to your beneficiary. When the loan is paid off, you request the lender to release the assignment.

Typically the business or the owner owns the policy and pays the premiums. The lender is not the owner; they are the assignee for the loan amount only. Ownership affects who can change beneficiaries and riders, so set this correctly up front.

A common approach is to match the original loan amount or the current balance and choose a term length that matches the loan term. If multiple loans exist or your obligation could increase, consider a cushion or layered coverage.

Most borrowers choose level term life that matches the loan term because it’s affordable and straightforward. Permanent life can make sense if you want lifetime protection or to keep the policy after the loan ends for estate, key person, or buy-sell needs.

Often yes. If your current coverage amount and ownership/beneficiary setup are acceptable to the lender, you can submit a collateral assignment on the existing policy. The insurer must acknowledge the assignment for it to be valid.

Ask the lender for a release of assignment; the insurer will remove the lender’s rights. If you refinance with a new lender, you’ll typically file a new collateral assignment referencing the new loan.

As a general rule, life insurance premiums for policies where the business is a beneficiary or where a loan is protected are not income-tax deductible. Death benefits are generally received income-tax free. Always confirm specifics with your tax advisor.

Accelerated underwriting and no-exam options may approve qualified applicants in days. Timing depends on age, amount, health history, and the insurer’s program. For larger face amounts, full underwriting may be required.

You can use separate policies per owner, name multiple assignees, or file multiple assignments (subject to lender and insurer rules). Clear documentation avoids conflicts at claim time.

Standard life insurance pays only upon death. If you want protection for disability or illness affecting loan payments, consider adding riders where available or pairing with disability insurance or business overhead expense coverage.