Stop accepting loan repayments against insurance policies via credit cards: Irdai


New Delhi: The Insurance Regulatory Development Authority of India (Irdai) in a circular issued on Thursday asked life insurers to cease accepting loan repayments against insurance policies made via credit cards. The decision is effective immediately and applies to all life insurers.

“There are instances where policy loans are repaid using credit cards and the customer has one month time to repay the credit card dues. This could give rise to opportunities for availing of short-term (1-month) interest-free loans. However, the interest rates on default of repayment of credit cards are very high and in case the customer fails or delays payment of credit cards, this could put the customer to a huge financial exposure. In order to discourage tendencies to use credit cards for above purposes and to prevent policyholder’s vulnerability to financial delinquencies, repayment of Policy loans through Credit cards has been prohibited,” said Conjeevaram Baradhwaj, executive vice president (Legal & Compliance) & company secretary at Future Generali India Life Insurance.

In August last year, the Pension Fund Regulatory and Development Authority (PFRDA) made a similar decision to discontinue credit card contributions for tier-2 accounts of National Pension System (NPS).

Loan facilities can be provided by life insurance policies such as endowment, money-back, or whole-life policies. However, term insurance policies and unit-linked insurance policies (ULIPs) are not eligible for loans as they do not have a cash value at maturity. Moneylenders can offer loans up to 90% of the surrender value of an insurance policy, using the policy’s cash value as collateral.

“A policy loan is a facility provided by a life insurer to the policyholder for availing short-term finance facility, within the surrender value of the policy. Surrender value is the amount for which the policyholder if he stops paying premiums, after paying premiums for a minimum period. Interest is payable on Policy loans and the interest rate is around 9% to 10% p.a. compounding yearly. Customers can repay the policy loan whenever they would like to. However, if the loan is not repaid and if the outstanding loan and loan interest equals the surrender value, the policy is foreclosed by adjusting the outstanding amount against the surrender value,” said Baradhwaj.

To apply for a loan, borrowers must submit a loan application form, a copy of the insurance policy, and a signed agreement to the lender. Borrowers can take loans from moneylenders using the cash value part of policy as collateral.

Taking a loan against a life insurance policy offers advantages such as lower interest rates compared to personal loans and a faster approval process than other lending instruments.

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