NEW DELHI: The Finance Ministry is considering a move to stop the practice of using critical illness policy as collateral for various loans, said officials. “The IRDAI (Insurance Regulatory and Development Authority) has proposed that this is not fair to use critical illness policy, which is meant for the expenses for life threatening disease to be used for the collateral for loans.
The matter is under consideration,” said a senior official from the finance ministry. Generally, insurance policies act as a security for the lender in the sense that when it is kept as a collateral, the claims from the policy can be used for repayment in case the lender loses his life or faces any critical illness which prevents him from paying loan instalments. Housing finance companies and non-banking financial entities mostly use this option.
However, insurance regulator IRDAI feels that this is wrong practice in case of critical illness. Under the critical illness policy, insurance companies pay the insured individual a lump sum amount if diagnosed with any of the specific illnesses on a predetermined list. But if that money is diverted in paying installment then this is not in the right use of the policy instrument.
“The move was initiated after receiving various feedbacks from stakeholders and insurance companies have a different view. The IRDAI will soon have a discussion and the final decision will be taken after that,” the official added.
Meanwhile, the General Insurance Council (GIC) has opposed the move and has written a letter to the IRDAI stating that the move is not in the interest of the policy holders. It is argued that critical illness covers are taken by people either to meet the treatment costs or to manage their lifestyle even after diagnosis of a critical illness and in such cases, people should have the independent choice to use them as collateral. While the insurance regulator will take the final call, officials have pointed out that lenders and policy holders can still use their general life insurance policies as collateral for their housing, vehicle or personal loan.