The Insurance Regulatory Development Authority of India (IRDAI) has recently announced that credit card payments will no longer be accepted for the repayment of loans taken out against life insurance policies. This decision will affect all those policyholders who have taken a loan against their life insurance policies and previously used credit cards as a mode of repayment of the loan.
Loan against life insurance policy is a facility where policyholders can pledge their life insurance policies to avail of a loan without the need for additional collateral.
However, not all life insurance policies provide this facility, and the loan amount is determined by the surrender value of the policy. Policyholders must also meet certain eligibility conditions to qualify for the loan.
Policyholder may also approach their insurer for a loan against their life insurance policy. What essentially happens is that the insurer lends money for an interest against the cash value of the policy. In case the borrower fails to repay the loan, the borrowed amount together with the interest in deducted from the death benefit of the policy.
Though loans secured by insurance policies offer a lower rate of interest than those available on personal loans, policyholders must be cautious about the risk of losing insurance coverage if the interest due on the loan exceeds the surrender value.
In its recent circular of May 4, 2023, IRDAI did not provide any specific reason for the discontinuation of credit card payments as a mode of repayment for insurance policy loans, but announced that borrowers cannot repay their loans on insurance policies through credit cards, henceforth.
Incidentally, this decision follows a similar move by the Pension Fund Regulatory and Development Authority (PFRDA) in August 2022, which also discontinued accepting credit card payments for subscriptions and contributions in the National Pension System (NPS) Tier-II accounts.
The decision by IRDAI to discontinue the facility of repayment of insurance policy loans using credit cards will surely come as a surprise to some policyholders who relied on this mode of payment.
Insurance companies are now expected to provide guidance on alternative modes of repayment for policyholders who previously relied on credit card payments.
As for taking loans against life insurance policies, policyholders must ensure that they comply with the eligibility conditions and carefully evaluate the risks involved before taking out loans against their insurance policies.