It is a life insurance policy designed to pay off a borrower’s debt if that borrower dies.
If, for example, you borrowed from a lending institution like a bank or microfinance or even from an individual, in the event that you die, your debt/loan would be paid off.
The face value of your credit life insurance policy will proportionately decrease with the outstanding loan amount as the loan is paid off over time until both reach zero value.
Credit Life Insurance should not be confused with a standard life insurance policy because it is designed to pay off the balance of a loan in the event of death or other contingencies such as disability.
You should ensure that you understand the contingencies the credit life will cover in order to determine if it is sufficient or whether you would need extra cover.
The value of the policy must not exceed the total loan amount.
Who owns the policy?
The lender- that is the lending institution such as a bank or a microfinance institution or the individual you borrow from owns the policy.
Credit Life insurance is taken out on the life of the borrower (you) for the benefit of lender. Technically, anyone who has advanced money (or given a loan) to another may take out a life insurance policy on that other person’s life.
For example, if Martha borrowed 5 million from Faith, Faith can take out a life insurance policy on Martha’s life to the extent of the 5 million she is owed so that if Martha passes away, she can still get her money.
Who pays for this insurance (premium)?
Typically you, the borrower, will pay the premium.
If I got a loan to buy property, would the credit life insurance also cover the property and cater for the replacement of that property in case anything happened?
No, the credit life insurance will pay out only in case you die or on the happening of any other events that you agreed on when you signed the policy.
However, you can (and indeed should) take on a separate property insurance cover (say house owners insurance for a house or motor comprehensive insurance for a car) in order to protect the property for example. This would ensure that in case anything happens, you are covered and the property can be replaced or restored.
If I already have a life insurance policy, can I use it for credit life insurance?
If the terms of your current policy allow, it may be used as your credit life insurance for the duration of the loan.
Note that the length of your policy (policy term) should be equivalent or longer than the amount of time you are taking the loan for (loan period) and the value of your insurance policy (the sum assured) should be equal to or more than the loan amount. It is also important that the policy covers the same contingencies that are required by the lender/bank.
If the loan is bought off by another lending institution, what happens to the credit life insurance cover?
The new lender will typically arrange the credit life insurance on the new loan.
In other words, the insurance on your old loan will end and the new lender will start a new and separate insurance for the loan.
In certain cases, it may be possible to get a premium refund for the period you have not used the insurance cover.
Can I (the borrower) choose the insurance company to use?
Yes, according to the Bank of Uganda Consumer Protection guidelines, the lending institution should provide at least four providers for you to choose from.
Who can claim and who do they claim from?
Technically, the claimant is the lending institution (or the individual who you borrowed from) because they are the beneficiary of the policy (also referred to as the assured). So they will initiate the claim with the insurer.
As the borrower you should however take it upon yourself to know what your credit life insurance covers in order to determine under which circumstances the insurance company will pay or not pay the outstanding loan.
If I died, can my family/beneficiaries benefit from this insurance?
Your family would benefit only to the extent that they will not have to pay the balance on your loans and that your property may not be taken over by the lender to clear your loan balance