THE OBLIGATION OF LIFE INSURANCE IN BANK LOAN AGREEMENTS
The general public often assumes that a bank loan (credit facility) is extinguished upon the death of the borrower (debtor). Such an assumption is not entirely erroneous, since life insurance may provide indemnification for the debtor’s obligations toward the creditor (the Bank) upon the debtor’s death. Conversely, the assumption is not entirely accurate, because not every loan is secured with life insurance, and payment of the debtor’s obligations to the Bank upon death is contingent on compliance with specific conditions.
What Is Life Insurance?
Article 1(1) of Law No. 40 of 2014 on Insurance (“Insurance Act”) defines insurance as a contract between two parties namely, the insurer (insurance company) and the policyholder under which the insurer, in consideration of a premium, undertakes:
-
-
- to indemnify the insured or the policyholder against loss, damage, expenses incurred, loss of profits, or liability to third parties arising from an uncertain event; or
- to make a payment contingent upon the death of the insured or upon the survival of the insured, in an amount determined in advance and/or based on fund management results.
-
Life insurance constitutes a specific branch of insurance business. Pursuant to Article 1 (6) of the Insurance Act, life insurance is defined as the undertaking of risk management services that provide payments to the policyholder, the insured, or another beneficiary entitled thereto, in the event of the insured’s death or survival, or at a time stipulated in the policy, in an amount predetermined and/or based on fund management results.
What Is Credit Life Insurance?
Specifically, credit life insurance (life insurance associated with credit) is governed under the Regulation of the Financial Services Authority (Otoritas Jasa Keuangan/“OJK”) No. 20 of 2023 concerning Insurance Products Linked to Credit or Sharia Financing and Suretyship Products (“OJK Reg. 20/2023”). Article 1(20) thereof defines credit life insurance as a life insurance product that, at minimum, provides coverage against the risk of death, associated with the fulfillment of a debtor’s financial obligations to a creditor pursuant to the loan agreement.
According to the Indonesian Life Insurance Association (Asosiasi Asuransi Jiwa Indonesia), the functions of credit life insurance include:
-
-
- Protecting the debtor’s family from indebtedness;
- Preventing the transfer of debt obligations to the debtor’s heirs;
- Ensuring legal certainty for financial institutions; and
- Providing peace of mind for the debtor.
-
Obligation of Credit Life Insurance
Under the prevailing laws and regulations concerning credit life insurance and banking, there is no statutory mandate requiring banks to secure a loan with credit life insurance. The use of credit life insurance in loan agreements is facultative and depends upon the bank’s internal policy.
If a loan agreement stipulates coverage through credit life insurance, the debtor must fulfill the necessary requirements to obtain a policy. Provided that the policy remains in force and the debtor performs all obligations under the policy, the insurer is legally bound to discharge the debtor’s outstanding indebtedness to the bank upon the debtor’s death.
Conclusion
Credit life insurance is a form of life insurance that provides coverage for the risk of a debtor’s death, specifically in relation to the fulfillment of the debtor’s financial obligations to the bank as creditor under the loan agreement. Such obligations are enforceable only if the debtor has complied with the conditions of the credit life insurance policy.
Legal Basis
- Law No. 40 of 2014 on Insurance.
- 3OJK Regulation No. 20 of 2023 concerning Insurance Products Linked to Credit or Sharia Financing and Suretyship Products.
Author:
Nicko Surya Arilangga, S.H.
Masta Pasaribu
Editor:
Muhammad Arief Ramadhan,S.H.