If Insurance Regulatory and Development Authority’s (IRDA) draft guidelines on product design comes in affect, life insurers may not give loans against Unit-Linked Insurance Plan (ULIPs). In second draft guidelines on product design IRDA had said that loans under ULIPs should not be allowed.
At present, policyholders can get loan against saving and investment policies, both traditional and unit-linked up to 85% of the policy surrender value.
Banning loan on ULIPs is aimed to provide immunity cover to insurers against the volatility of stock markets.
As per insurers, equity markets are volatile; hence one can not be sure about the future value of policies. Fund value can fall substantially if market plunges. And in such cases fund value could be lesser than the loan value.
However, this move could prove to be a below for policyholders, as they will not be able to mobilize funds at the time of emergency. A customer can not even surrender the ULIP policy and withdraw the fund due to five year lock-in period.
At present, in most cases, a policyholder is eligible to get loan after sustaining policy for three years. Interest charged on insurance policies varies from company to company. At present most company charge half-yearly interest of 9%.
A policyholder needs to pay the interest along with the regular premium payments. At present, if an insurance company provides loan against ULIPs and market value of the insurance policy slips below the loan amount, the insurance contract is canceled.
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