Loan facility now mandatory for life insurance policies: How to borrow funds against your plan
The Insurance Regulatory and Development Authority of India (IRDAI) announced on Wednesday (June 12) that policy loans are now a mandatory feature in all life insurance savings products.
This decision is part of a master circular issued by the regulator, consolidating various regulations related to life insurance policies.
Key highlights of the new mandate
Mandatory policy loans
All life insurance savings products must now include the facility of policy loans.
This will enable policyholders to access funds by borrowing against their life insurance policies, thereby meeting urgent liquidity requirements.
Extended free look period
The free look period, which allows policyholders to review the terms and conditions of their policies, has been extended to 30 days from the previous 15 days.
Partial withdrawals in pension products
The circular permits partial withdrawals under pension products.
Fair surrender practices
In cases of policy surrender, IRDAI emphasised the need for ensuring reasonableness and value for money for both surrendering and continuing policyholders.
The regulator has also called for robust systems to be in place for the grievance redressal of policyholders, ensuring their concerns are addressed efficiently.
Understanding loans against insurance policies
A loan against an insurance policy allows policyholders to borrow money by pledging their insurance policy as collateral.
As of now, this facility is available for traditional policies like money back and endowment policies, which have both savings and life cover components.
Unit-linked insurance plans (ULIPs) and term insurance covers are generally not accepted as collateral for such loans.
Eligibility and loan amount
To be eligible for a loan against an insurance policy, the policy must have acquired a surrender value.
The amount sanctioned for such loans usually ranges from 85% to 90% of the policy’s surrender value.
Interest rates and repayment
The interest rates on loans against insurance policies are generally lower than those for other secured loans and significantly lower than personal loan rates.
For instance, the Life Insurance Corporation (LIC) of India charges an interest rate of 10%, payable on a half-yearly basis, according to Bankbazaar.
The repayment tenures are flexible, allowing borrowers to make interest-only payments with the option to deduct the loan amount from the claim at settlement.
How to obtain a loan?
Check eligibility: Ensure the policy has a surrender value and can be assigned in favor of the lender.
Application process: Approach the insurer or a bank that offers loans against insurance policies. Major players like LIC, HDFC Bank, and State Bank of India (SBI) provide this facility.
Sanction and disbursement: Once the application is approved, the loan amount, typically 85% to 90% of the surrender value, will be disbursed.
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