Policyholders can avail loan against ULIPs

The Insurance Regulatory and Development Authority (IRDA) has allowed life insurance companies to give loans against unit-linked insurance plans (ULIP), this will help those policy holders who are in need of short-term funds. However some companies have started offering this feature along with their new products. Before this, insurers used to sanction loans only against traditional plans, barring term insurance policies.

I Sambasivarao, appointed actuary, Star Union Dai-ichi Life Insurance told, “Earlier, policyholders were allowed to make partial withdrawals from their ULIPs after three years. Now, the lock-in period has gone up to five years, which means that policyholders who are in need of short-term funds will not have access to their money till then. Therefore, a need to offer the loan facility was felt. ” On Thursday Life Insurance launched its two new ULIP products with this option. Under these plans, policyholders can avail loan after completion of three policy years at an interest rate of 10% per annum, with half-yearly compounding. The loan repayment can be done during the policy term, but partial withdrawal from ULIP is not allowed unless the loan is closed.

Meanwhile LIC is providing loans against its traditional policies at 9% and the repayment of loan is to be done on a half-yearly basis. This year, in June the insurance regulator had issued a circular in which it had introduced sweeping changes in the ULIP charge structure, the insurance regulator had also specified the norms for sanctioning the loan. The maximum loan amount was set at 40% of the net asset value in ULIPs where equity accounted for over 60% of the total portfolio. In case of policies the limit was set at 50% where debt instruments accounted for more than 60%.

P Nandagopal, CEO of IndiaFirst Life Insurance said, “The rationale behind permitting the loan facility is to prevent policyholders in need of short-term funds from surrendering the policy. They can take a loan against the policy instead and stay with it through the original tenure.”

IndiaFirst Life Insurance Company will give loan against its ULIP products before the completion of five years. The interest rate on loan is benchmarked to the SBI’s Base Rate + 7%.

Both the companies do not give loans after five years, as the policyholder can avail the partial withdrawal facility then, in case there are any outstanding dues, are cleared.