According to Conjeevaram Baradhwaj, executive vice president (Legal & Compliance) & company secretary at Future Generali India Life Insurance, this decision was made to prevent policyholders from becoming vulnerable to financial delinquencies.

Borrowers must submit a loan application form alongside a copy of their insurance policy and a signed agreement to take out a loan on their policy. Loans can be taken out via endowment and money-back life insurance policies, as well as whole-life policies. However, term insurance policies and unit-linked insurance policies (ULIPs) are not eligible for loans as they do not have a cash value at maturity.

The interest rates on defaulted credit card repayments are particularly high and can leave customers with considerable financial exposure if they’re unable to make repayments. This makes such practices particularly risky, which is why insurers have been recommended to prevent accepting them.

Despite this new ruling, there are still attractive advantages to taking out loans against life insurance policies, such as lower interest rates than personal loans and a faster approval process than other lending options.

Last August, the Pension Fund Regulatory and Development Authority (PFRDA) made a similar decision to stop accepting credit card contributions for National Pension System (NPS) tier-2 accounts.