In a recent circular, the Insurance Regulatory Development Authority of India (IRDAI) has prohibited all life insurers from accepting loan repayments against insurance policies made through credit cards. The circular, which was issued on 4 May 2023 is effective immediately and applies to all life insurers. This applies to policies such as endowment, money-back, or whole-life policies, which are eligible for loan facilities. However, term insurance policies and unit-linked insurance policies (ULIPs) do not have a cash value at maturity and therefore are not eligible for loans.

 

The decision was made to discourage the use of credit cards for policy loan repayments. A practice where customers get one month to repay the credit card dues which could lead customers availing of short-term interest-free loans. However, interest rates on credit cards as well as interest rates on delay or defaulting of repayment of credit cards are very high which could expose the customer to financial delinquencies. To prevent policyholders from such vulnerabilities, the repayment of policy loans through credit cards has been prohibited.

 

A policy loan is a short-term finance facility provided by a life insurer to the policyholder within the surrender value of the policy. The surrender value is the amount for which the policyholder can stop paying premiums after paying premiums for a minimum period. Customers can repay the policy loan at any time, and the interest rate is usually around 9-10% p.a. compounded yearly. However, if the loan is not repaid and if the outstanding loan and loan interest equal the surrender value, the policy is foreclosed by adjusting the outstanding amount against the surrender value.

 

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

 

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.  To apply for a loan, borrowers need to submit a loan application form, a copy of the insurance policy, and a signed agreement to the lender.

 

The IRDAI recent circular aims to protect policyholders from financial exposure by prohibiting the use of credit cards for loan repayments against insurance policies.