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| No more loans against Ulips | | Plans with loan clause denied approval regulatory ban coming |
| Manojit Saha & Niladri Bhattacharya / Mumbai Jan 26, 2012, 00:14 IST |
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 The Insurance Regulatory and Development Authority (Irda) plans to ban loans by life insurance companies against unit-linked life insurance policies (Ulips). The insurance regulator is not approving any unit-linked plans with a clause of loans against policy.
“Irda has rejected our new unit-linked plan and has asked us to refile it after removing the loan facility clause,” said a senior official at a large private life insurance company on the condition of anonymity.
Confirming the development, Irda Chairman J Hari Narayan said, “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.”
Insurance officials said the move might further dent the sales of Ulips as the loan facility acted as an added feature. The facility first came into force after Irda raised the lock-in period for such plans by two years to five in September 2010.
| LOANS AGAINST MARKET-LINKED PLANS RISKY |
| * Irda not approving any Ulips with loan facility |
| * Sept 2010 Loans against Ulips started |
| * 75% of the fund value could be the maximum loan amount |
| * Interest rate offered was benchmarked against the base rate of banks — currently around 10.75-11% |
| * Highest loan tenure could equal the policy tenure |
| * 90% of the fund value can be the maximum loan amount for traditional policies |
“The loan facility was one of the selling points for these long-term insurance products. So, this would impact the sales of unit-linked plans,” said K Sahay, CEO, Star Union Dai-ichi Life.
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, said an official of a private life insurance company.
Another reason behind allowing loans was to prevent policyholders in need of short-term funds from surrendering the policy, added an actuary at a private life insurance company.
The loan amount against a unit-linked policy depends on the extent of the equity exposure in the portfolio. Generally, insurance companies provide up to 70-75 per cent of the fund value of a unit-linked policy as loan if more than 60 per cent of the fund is invested in debt instruments. However, the loan amount comes down to 50 per cent of the fund value where equity exposure accounts for more than 60 per cent of the total portfolio.
For traditional or endowment plans, companies extend loans up to 90 per cent of the fund value. The rate of interest varies from 9.5-12 per cent per annum, benchmarked against the base rates of public sector banks. The loan tenure can be as high as the policy term. "Traditional or endowment plans are safer products and we have no issues with a loan facility against these plans," the Irda chairman added.
Since September 2010, when stringent unit-linked guidelines came into force, insurance companies have focused more on traditional plans and the sale of Ulips, which till then constituted 80 per cent of the total volume, came down drastically. In the current financial year, the downward trend has continued, with a choppy equity market and high inflation adding to the problems. During April-November, premium collection by the life insurance industry was down almost 19 per cent to Rs 2,428.86 crore from Rs 76,989.88 crore reported in the year-ago period. Ulips accounted for only 20-25 per cent of the sales.
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