LIC hikes interest rates on loans against policies

Life Insurance Corporation has hike interest rates on loans against policies in that way shutting an arbitrage opportunity for policyholders. The corporation has also improved interest rates on delayed payments. Until recently the corporation charged 9% on loans against policies. These provided policyholders an opportunity to earn a spread by borrowing from LIC and parking funds in fixed deposits of triple A (AAA) rate companies such as HDFC, which offers returns of 9.5% on 15 month deposits. To avoid this, the corporation has raised interest rates to 10%.

“The policy condition states that interest rates on loans would be revised from time to time,” – LIC. Unlike the EPFO , which allows employees to tap their retirement savings only for specific events, LIC freely grants loans to policyholders for up to 90% of the surrender value of the policy, including cash value of bonus. The only requirement is that the policy should be assigned in favour of the corporation.

The interest rates charged by LIC are lower than the interest rates charged on loan against public provident fund scheme. Under the PPF scheme loans are available at 2% over the prevailing rate, which at present is 8.8%. Also under PPF the maximum loan amount is 25% of the balance two years earlier.