Termination of employment leaves questions as to who settles outstanding loan obligations. It is the argument of former employees that insurance covers should pay outstanding loan obligations when they can no longer fulfill salary loan obligations for various reasons.

In this write up we explore the possibilities and limitations of insurance covers to pay salary loans when you lose your job.

What is a salary loan?

A salary loan is a type of personal loan where the borrower’s salary serves as collateral.

There is no collateral required before you are given the loan other than an undertaking from the employer and employee that a percentage of your monthly salary will be remitted to the lender to pay the loan.

Salary loans have become a common feature in the labor market in Uganda because they are easily accessible and the lender is guaranteed of payment on the basis of the employee’s paycheck.

Types of Salary loans

Salary loans can be placed into two categories; the first are loans offered by a financial institution to the employee secured by his or her salary. The employer is only involved to confirm the status of the borrower and to remit a percentage of their monthly pay to the lender.

The second type is where the employer gives the employee a loan, or salary advances, or borrowing from an in house saving scheme and the payment deductions are done by the employer.

Payment of Salary loans at termination of employment

The obligations in a salary loan agreement continue even with the termination of employment.

The question of who settles pending loan payments in different forms of termination has been settled by court in different remarkable decisions. Where an employee is lawfully terminated they carry their loan obligations as held in DFCU versus Donna Kamuli. If the termination was unfair, their outstanding loan obligations should be put into consideration in determining quantum damages but they are still liable to pay the outstanding loan obligations as held in Uganda Development Bank versus Florence Mufumbo.

Insurance Covers

Insurance is a contract under which the insurance company undertakes to pay the outstanding loan amounts in case the borrower fails to pay due to specified reasons. An insurance cover is only invoked to meet the outstanding loan obligations if the reason for your inability to pay falls within the scope of the cover.

Insurance policies vary and differ depending on the loan agreement and who takes out the insurance.

The loan agreement may stipulate that either the lender or borrower takes out insurance. Some policies may cover payment in case of death, disability, insanity or sickness. Other policies cover a percentage of the loan amount at the occurrence of stipulated events.

In Housing Finance Bank Ltd & Anor vs Igeme Nathan Nabeta, HCCS No. 228 of 2012, it was held that the insurance taken out should pay the default on the payments.

In the facts and circumstances of this case, the loan the defendant took was a salary loan and it was fully secured by an insurance policy according to the contractual requirements of the policy document. It was also a contractual requirement that the policy was security for a loan under the loan agreement.

You cannot seek to rely on an insurance cover for circumstances out of the scope of the cover or that were never envisaged by the cover.

In cases of unfair termination, employees have argued that they are entitled to their loans being paid since they were intended to be settled to be settled out of salary deductions.

It’s crucial to review the terms and conditions of your insurance policy to understand what it covers and under what circumstances. If you are unsure, you should contact your insurance provider or agent for clarification.

Insurance covers are also limited to cover a specific amount of the loan at the occurrence of certain events and not the whole loan amount. The position as was in ABSA Bank Uganda Limited versus Mubuuke Jude No. 371 of 2020 is that the insurance cover will pay for the specified amount and the amount that is outstanding is still the obligation of the employee.

The employee’s obligations are not discharged by limit of the cover or loss of the job.

Insurance policies typically do not directly pay off salary loans unless there is a specific provision within the insurance policy that covers loan repayment in certain circumstances, such as disability or death.