• July 23, 2024

Irdai Praises Insurers For Protecting Policyholders By Prohibiting The Use Of Credit Cards To Repay Insurance Policy Loans

The Insurance Regulatory and Development Authority of India (Irdai)’s decision to forbid the repayment of loans obtained against life insurance policies using credit cards has been praised by insurers.

Because credit card issuers charge higher interest rates on outstanding balances, insurance experts contend that using credit cards to pay off loans is not in the best interests of clients. Irdai has instructed all life insurance providers to immediately stop accepting credit cards as payment for insurance policy loans.

The Irdai’s decision, according to Kotak Mahindra Life Insurance Company President, Chief Actuary, and Chief Risk Officer Sunil Sharma, is in the best interest of policyholders.

Sharma adds that while policy loans have substantially lower interest rates than unsecured personal loans, it is not economically sensible for customers to pay off policy loans with credit cards.

The move by the regulator, according to SecureNow co-founder Kapil Mehta, is probably motivated by worries that people who repay insurance loans with credit cards can become caught in a debt trap where the cost of payback is more than the cost of continuing the loan.

While credit card interest rates might reach 20%, the majority of insurance loans have rates between 8% and 15%. Mehta also notes that there might be a problem with who pays the fees associated with using a credit card because such fees are subtracted from the customer’s payment, which the insurers would be responsible for.

Aditya Birla Sun Life Insurance’s MD and CEO, Kamlesh Rao, applauds the Irdai’s judgment and claims it protects policyholder interests and encourages prudent financial planning. Instead of utilizing a credit card—another borrowing option—, Rao recommends policyholders return their loans with accumulated funds.

Image Source : https://i.ndtvimg.com/i/2016-05/credit-card-new_650x400_41463139483.jpg

According to Anil PM, Head of Legal, Compliance, and FPU at Bajaj Allianz Life Insurance, the likelihood of policyholders experiencing financial difficulty due to increasing debt burden, potential predatory lending, and fraud are reduced by forbidding the repayment of insurance policy loans through credit cards.

Life insurance policies such as endowment, money-back, or whole-life policies may include loan possibilities. However, because they do not have a cash value at maturity, term insurance policies and unit-linked insurance policies (ULIPs) are ineligible for loans. Lenders may use the cash value of an insurance policy as collateral to loan up to 90% of the surrender value of the policy.

Borrowers must submit a loan application form, a copy of their insurance policy, and a signed contract to the lender to be considered for a loan. Moneylenders will lend to borrowers who put up the cash value portion of the insurance as collateral. It is advantageous to borrow money against a life insurance policy because the approval process is quicker and the interest rates are cheaper than those for personal loans.

In conclusion, insurers have mostly praised the Irdai’s decision to forbid the repayment of insurance policy debts with credit cards. According to insurance experts, this action is ideal for clients since it keeps them from getting trapped in debt due to the high-interest rates charged by credit card companies. Customers are instead instructed to pay back their loans using accumulated funds, which is a more responsible method of financial planning.