Experts are of the view that financial discipline is paramount and repaying loans through credit cards should be avoided
IRDA had issued a circular on May 4, directing life insurance companies to stop the facility of repayment of loans taken on insurance policies through credit cards.
The regulator IRDA’s decision to put a moratorium on repayment of loans taken against life insurance policies is a good move and according to insurers will prevent policyholders from falling into debt trap.
The insurers said that it was not in the interest of the customer to repay the loan by borrowing on the credit card and paying very high interest rates on the outstanding balance on the card.
In a recent order, the Insurance Regulatory and Development Authority of India (Irdai) has asked all life insurers to stop accepting credit cards for repayment of loans against insurance policies with immediate effect.
Experts are of the view that financial discipline is paramount and repayment of loans through credit cards should be avoided as in case of default or partial payment, card issuing companies will have to pay hefty interest rates.
Commenting on the regulator’s move, Sunil Sharma, President, Chief Actuary and Chief Risk Officer, Kotak Mahindra Life Insurance Company, said that it is a good move by IRDA as it protects the interest of the policyholders.
“The interest rates on policy loans are much lower than that of unsecured personal loans and hence, it would not make financial sense for customers to use credit cards to repay the policy loan,” he said.
Kapil Mehta, co-founder of SecureNow, said the regulator is probably concerned that repaying insurance loans through credit cards fall into a debt trap where the cost of repayment exceeds the cost of continuing the loan.
“Most insurance loans cost between 8 per cent and 15 per cent, while credit card interest rates can exceed 20 per cent,” he said.
Mehta further said that perhaps there is also the issue of who bears the cost of using the credit card.
Typically, the insurer will receive an amount that is less than the amount paid by the customer because the fee is deducted, he said, adding insurers bear this substantial cost that may not be factored into pricing.
Welcoming Irdai’s decision, Kamlesh Rao, MD & CEO, Aditya Birla Sun Life Insurance said that it helps in ensuring the best interests of the policyholders and supports responsible financial planning.
“Policyholders are advised to repay their loan through accumulated funds instead of using credit card, which is another credit facility,” said Rao.
Anil PM, Head – Legal, Compliance & FPU, Bajaj Allianz Life Insurance said that by disallowing repayment of insurance policy loans through credit cards, “policyholders are at risk of financial distress due to increased debt burden, potential predatory lending and frauds”. is facing.
IRDA had issued a circular on May 4, directing life insurance companies to stop the facility of repayment of loans taken on insurance policies through credit cards.
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