The repayment of loans carried out against life insurance policies will no longer be accepted through credit card, according to a recent announcement from the Insurance Regulatory Development Authority of India (IRDAI). All policyholders who have borrowed money against their life insurance policies and have in the past repaid the loan using credit cards will be impacted by this decision.
With the loan against life insurance policy option, policyholders may borrow money without putting up any extra collateral by pledging their life insurance policies as security.
The loan amount is based on the policy’s surrender value, and not all life insurance plans provide this capability. In order to be eligible for the loan, policyholders must also fulfil specific qualifying requirements.
A loan against a life insurance policy may also be requested from the insurer by the policyholder. In essence, the insurer borrows money in exchange for interest against the policy’s cash value. If the borrower defaults on the loan, the borrowed amount and interest will be subtracted from the policy’s death payout.
Although interest rates on loans secured by insurance policies are lower than those on personal loans, policyholders must be wary of the possibility of losing insurance protection if the amount owed on the loan exceeds the surrender value.
Borrowers would no longer be able to pay off their loans on insurance policies using credit cards going forward, according to a new circular from IRDAI dated May 4, 2023. IRDAI did not specify why credit card payments as a method of repayment for insurance policy loans would no longer be accepted.
By coincidence, the Pension Fund Regulatory and Development Authority (PFRDA) made a similar decision in August 2022 and stopped accepting credit card payments for subscriptions and contributions in Tier-II accounts of the National Pension System (NPS).
Some policyholders who depended on this method of payment will undoubtedly be surprised by IRDAI’s decision to end the ability to repay insurance policy debts using credit cards.
For policyholders who previously depended on credit card payments, insurance firms are now obligated to provide advice on other ways to make payments.
In terms of taking out loans against life insurance policies, policyholders must make sure they meet the requirements for eligibility and carefully consider the risks involved before doing so.
