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Life Insurance Council to give views on ban on loans against ULIPs

To make the ULIPs more attractive, the loan feature was introduced, with the interest rate benchmarked against the base rate offered by banks

May 23, 2012 4:44 IST | India Infoline News Service
According to media reports, the Insurance Regulatory and Development Authority (IRDA) has asked the Life Insurance Council to give its views on proposed ban on loans against ULIPs (unit-linked life insurance policies). The meeting between the insurance regulator and the Council was held on 22nd May. 

Loans against ULIPs started in September 2010 after the lock-in period on these products was raised from three to five years. Earlier, when the lock-in period was three years, policyholders were allowed part-withdrawal after the period. With a lock-in period of five years, the loan facility was provided to meet customers' short-term fund requirements.

Hence, to make the ULIPs more attractive, the loan feature was introduced, with the interest rate benchmarked against the base rate offered by banks.

The loan amount depended on the equity exposure of each portfolio. The greater the equity exposure, the lesser would be the loan amount. Generally, the maximum loan limit on these products is up to 75% of the fund value and the loan tenure can be equivalent to the policy tenure.

IRDA had objected to this practice in January. At that time, IRDA chairman J Hari Narayan was quoted saying, “Fundamentally, ULIPs are risky products, given that they are linked with the stock market. In case the fund value drops dramatically due to negative price movement, the risk would come to the insurers. Hence, loans against such products are not advisable.”

Thus, the loan option which was used to attract buyers will go now. And selling ULIPs would be difficult for the companies.

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