IRDAI disallows repayment of life insurance policy loans via credit cards

The IRDAI has discontinued the use of credit cards to repay loans taken against life insurance policies. Learn about the reasons behind this decision.

IRDAI discontinues credit card repayment for life insurance policy loans

Key highlights:

  • IRDAI discontinues credit card repayment for life insurance policy loans.
  • Move aimed at streamlining loan repayment and ensuring financial stability.
  • Loan amount typically 80% of policy surrender value; eligibility criteria apply.
  • Policyholders advised to explore alternative repayment methods.

The Insurance Regulatory Development Authority of India (IRDAI) has made a significant move by discontinuing the practice of repaying loans taken against life insurance policies using credit cards. In a circular issued on May 4, 2023, the IRDAI directed all life insurers to immediately stop accepting credit cards as a mode of repayment for such loans. This decision follows the Pension Fund Regulatory and Development Authority's (PFRDA) earlier announcement in August 2022 to discontinue the use of credit cards National Pension System (NPS) Tier-II accounts.

Also read: Do You Calculate Your Loan Repayment Cost: Learn How To Do It

Understanding Loan against Insurance Policy

A loan against an insurance policy allows policyholders to borrow money by pledging their life insurance policies as collateral. Unlike traditional loans or credit card loans, this type of loan does not require additional assets as security. The loan amount is determined based on the surrender value of the policy, and the interest rates and repayment options vary among insurers.

Eligibility and Loan Amount

Not all life insurance policies are eligible for a loan against them. Policies such as whole life policies, money-back policies, savings plans, and endowment plans generally provide this option. In some cases, Unit-Linked Insurance Plans (ULIPs) may also be eligible, depending on the insurer's policies.

The loan amount typically corresponds to around 80% of the surrender value of the policy. For instance, the State Bank of India (SBI) offers loans of up to 85% of the surrender value without any maximum limit.

Factors to Consider and Charges

Loans secured by insurance policies usually carry lower interest rates compared to personal loans. However, policyholders need to be cautious as they may risk losing their insurance coverage if the interest due on the loan surpasses the surrender value.

Insurance companies or financial institutions may charge a small loan processing fee to facilitate the loan. For example, SBI applies a processing fee of 0.35% of the loan amount, with a minimum of Rs. 500 and a maximum of Rs. 2,500, plus applicable GST.

Also read: Loan Against Mutual Funds And Stocks Become Popular. Are They A Good Choice?

IRDAI's Decision and Implications

The recent decision by the IRDAI to discontinue credit card repayment for loans against life insurance policies aims to streamline and regulate the loan repayment process. While the circular does not provide explicit reasons for the decision, it may be driven by concerns over financial stability, risk management, and compliance with regulatory standards.

The decision by the IRDAI to discontinue credit card repayment for loans against life insurance policies is a noteworthy development. While it may require policyholders to explore alternative repayment methods, it is aimed at enhancing transparency, risk management, and regulatory compliance. Borrowers should be aware of the eligibility criteria, loan amount, and associated charges when considering loans against their insurance policies. It is advisable to contact the insurance company to determine the available repayment options in light of the recent regulatory change.

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