Regulator Irdai's decision to bar repayment of loans taken against life insurance policies through credit cards is a good move and will prevent policyholders from falling into a debt trap, according to insurers.
Insurers said it was never in the interest of the customer to repay the loan by borrowing on a credit card and paying much higher 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 the acceptance of credit cards as a mode of re-payment of loans granted 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 because, in case of default or a part payment, one will have to pay heavy interest rates to the card issuing companies.
Commenting on the regulator's move, Sunil Sharma, President, Chief Actuary and Chief Risk Officer, Kotak Mahindra Life Insurance Company, said it is a good move by the Irdai as it protects the interests of policyholders.
"Interest rates on the policy loan are much lower compared to unsecured personal loan and therefore, it will not make financial sense for the customers to use credit cards to repay policy loans," he said.
Kapil Mehta, co-founder SecureNow, said the regulator is probably concerned that those repaying insurance loans through a credit card get into a debt trap where the cost of repayment is higher than the cost of continuing the loan.
"Most insurance loans are between 8 per cent and 15 per cent whereas credit card interest rates can be upwards of 20 per cent," he said.
Mehta further said that perhaps there is also the issue about who bears the charges of using a credit card.
Generally, the insurer will receive an amount that is less than what the customer paid because charges are deducted, he said, adding insurers would have to bear this substantial cost which may not be factored into the pricing.
Welcoming the Irdai's decision, Kamlesh Rao, MD and CEO, Aditya Birla Sun Life Insurance, said it helps ensure the best interests of policyholders and supports responsible financial planning.
"It is advisable for the policyholders to repay their loans through accumulated funds instead of using a credit card, which is another loan facility," Rao said.
Anil PM, Head -- Legal, Compliance and FPU, Bajaj Allianz Life Insurance said that by disallowing repayment of insurance policy loans through credit cards, "the risk of policyholders facing financial distress due to increased debt burden, potential predatory lending, and fraud is mitigated".
On May 4, Irdai issued a circular instructing life insurers to stop the facility of re-payment of loans taken against the insurance policy through credit cards.