When can Insurance pay your salary loan?

The government of Uganda over the years has introduced various policies that have promoted the growth of the financial sector.

With the amendment of the financial institutions Act (2016), several policies such as bancassurance, agent banking and Islamic banking have all been introduced to increase financial inclusion.
The Finscope Uganda survey report (2018) noted that loan protection insurance was the second highest insurance product bought in Uganda at 14% following health insurance at 51%. The report further highlights that 46% (8.5 million) adults borrowed money during the 12-month period prior to the survey – 65% (5.5 million) of whom borrowed to smoothen cashflow.

According to Ministry of Finance and Economic development website, the government has continued to introduce additional policies such as agricultural insurance financing, set up the Uganda Microfinance Regulatory and implemented several reforms to enhance Uganda’s AML/CFT Regime.

The financial sector through banking has continued to play a critical role aimed at poverty alleviation but also enabling masses to easily access finance for personal, business expansion and production. This has enhanced the growth of both the private and public sector all contributing to Macro-economic growth. With increased level of awareness, more adults will be able to access finance through Savings and Credit Cooperatives (SACCOs), Village Savings and Loan Associations (VSLSs).

Financial institutions give out loans their customers for various purposes. It is critical to note that the borrowers(debtors) are exposed to life threatening risks such as death, disability and life-threatening diseases which would create a burden on the estate of the deceased incase of contingency. Such an eventuality would deplete family assets or property thus increasing poverty because of the outstanding running balances.

Insurance over the years has evolved to respond to the emerging needs of society and even now extending to financial institutions who lend out money. The financial institutions have a financial interest in the life of the borrowers to the extent of the outstanding balances owed by the members. Through credit life insurance, financial institutions are protected from the risks of such exposures whereby the outstanding loan balances would be paid once an eventuality such as death, disability or even critical life-threatening diseases occurs to the debtors hence protecting the interests of the creditors. Therefore, insurance will continue to sustain financial institutions who lend out money which has allowed them to serve an even bigger mass, hence increasing financial inclusion. The borrower also benefits since their estate is protected from financial hardships. The premium payment modalities have also been made easier by the creditor. The Credit Life insurance policy operates under a decreasing term model implying that the outstanding loan balance reduces while the borrower continues to pay the loan. Once the loan has been fully repaid, it is expected that the insurer’s liabilities would cease as there is no outstanding loan balance. The Credit Life policy would be offered to all borrowers where different loan categories exist such as salary, car loans, mortgages etc. In a typical life insurance policy, the borrower would have to be subjected to medical assessment to determine the insurer’s acceptance of the risk i.e whether the insurer would agree to cover the client or not, however this would not be the case in credit life insurance since only borrowers with high valued loan balances would be considered as many would fall within the Non- medical automatic acceptance of the risk by the insurer.
The Credit life policy has an additional benefit known as a retrenchment cover. With the current volatile employment sector, Companies have retrenched employees due to global, pandemic, and macro- economic environment challenges. It is now a reality that being involuntary laid off is very possible today. Indeed, this would be adding salt to an injury because the employee does not have any additional income to continue servicing the loans. Insurers have been able to take into consideration this emerging risk of company restructure or closure due to economic volatility and provide insurance protection for a given period by covering the monthly loan repayments due say for three to six months depending on the policy structure Terms and Conditions. The retrenchment will incorporate redundancy involuntarily by the employer due to new technology, closure of the employer, restructuring of the business leading to lay-offs resulting in staff being reduced.
UAP Old Mutual Life insurance Company is licensed by the Insurance Regulatory Authority of Uganda offering various life assurance solutions to individuals and corporates. According to the Insurance Regulatory Authority Annual report 2021; the company paid the highest claims in the industry; more than Ush 55bn. To enable pricing of the Credit life product; UAP Old Mutual requires information about the financial institution noting the number of borrowers, maximum minimum loan amounts issued and the duration of the loan. The Credit Life product can also be extended to an additional funeral benefit to the borrower’s family following demise which will support the family with burial arrangements within the policy limit. The claims process documentation would include claim notification, completion of the claim form, copy of death certificate issued by NIRA and key loan supporting documentation of the borrower. These documents will have to be submitted by the financial institution.
Credit Life insurance is offered to various market segments ranging from banks, Micro-finance institutions, Saccos and even affinity groups. With our customer centric approach, UAP Old Mutual also offers bespoke solutions with a broad coverage at competitive premiums.
Conclusion
Credit life insurance pays off the outstanding debt balance if the borrower passes away or becomes permanently disabled or even if threatened by a critical illness. With the role played by financial institutions in the development of the economy, the product will enable the sustainability of these entities enabling them to reach a larger mass hence promoting accessibility to finance. Credit life insurance promotes economic development of the country by driving activity through the protection of financial institutions by covering any outstanding loan balances of the borrowers who are exposed to life threatening risks of death, disability and critical illnesses. It is indeed an invisible glue of the society enabling it to thrive in these ever-changing global times.
Joshua Akena
Head of Operations
UAP Old Mutual Life Assurance Company Limited