Do banks require key person insurance for business loans?

Yes, many Australian banks and lenders increasingly require key person insurance as a condition for approving business loans, particularly for small to medium enterprises. Research indicates that approximately 70% of businesses report that key person insurance was required for obtaining business loans. Lenders view key person insurance as essential risk mitigation because the death or disability of a key person can severely impact a business's ability to generate revenue and repay debts. This is especially critical when business loans are secured against personal assets like the family home. Most loan contracts include trigger event clauses specifying that the death or disability of a director, principal, or guarantor must be notified to the lender and often automatically triggers a requirement for debt repayment within a specified timeframe. Key person insurance provides the funds to meet this obligation. When seeking a business loan, lenders typically assess who the key persons are, require insurance covering at least the loan amount (and often more to cover business disruption), and may mandate that the policy remains in force for the duration of the loan. The insurance amount for debt-reduction policies depends on both business requirements and lender requirements, making it vital to understand loan contract terms.