Can a bank require key person insurance on me personally before releasing acquisition funds?

Yes, and this is a common lending condition rather than anything unusual. Where a bank's loan depends heavily on the acquired business continuing to be run successfully by one particular individual, the lender may reasonably see the death, disability, or sudden departure of that person as a real risk to the loan being repaid, especially for a smaller, closely held business without much depth of management beyond the buyer.

To manage that risk, lenders commonly require key person life insurance on the individual behind the purchase as a condition of funding, often with the policy collaterally assigned to the lender so that, if the insured event occurs, proceeds go toward reducing or paying off the outstanding loan. The specific coverage amount, whether the policy is owned by the borrower or the lender, and how proceeds are applied are all negotiated terms of the loan documentation rather than fixed by any general rule. A buyer should factor the ongoing cost of this insurance into the overall financing plan from the outset.