Flexible interest rate for policy loan

Kathmandu: The life insurance industry may see a flexible interest rate on policy loan facility. The interest rate will not exceed the prevailing market interest rate of the commercial banks.

Insurance Board, the regulatory body of insurance companies, has recently issued a ‘Life Insurance Policy Directive 2078’ which provides guidance for fixing the interest rate to be taken by the insurer on the insurance policy loan.

Section 7 of Article 11 of the directive has a provision that the interest rate charged on policy loan should not be higher than the prevailing interest rate of commercial banks.Now, an arrangement has been implemented to determine the interest rate with the approval of the Board of Directors of the concerned life insurer. It means no prior approval from Insurance Board is necessary now onwards.

Insurers are charging 9 to 11 percent interest on loans secured against life insurance policies. The insured had to pay interest at the same rate as before, despite the recent decline in bank interest rates due to the recent Covid19 (Corona) pandemic.
As the directives issued by the regulatory body is like a law for insurers, it is mandatory to follow the directive. Under normal circumstances, even if the interest rate of the insurance loan is on average, the life insurance company’s insured will also be able to benefit when the interest rate competition among the commercial banks is fierce or when the interest rate of the banking sector is cheaper.

How to get a policy loan?
Any policy stipulates the period after which the surrender value of the policy is received. If you also need a loan against the insurance policy, read the terms and conditions mentioned on the back page of the insurance policy to know the terms of surrender value.

As per the provisions mentioned in the policy directives, the surrender value of any policy (except micro and term) issued after the date of implementation of the directive will be received only 3 years after the date of issue of the policy. Also, the premium installment of at least 3 years must be paid.
Earlier, there was a provision that the surrender value could be obtained after completing one year in the policy of paying single premium and after completing two years in the policy of regular payment and paying two years premium.

The insured can get the loan at any time on the collateral of the insurance policy if the conditions and time period for obtaining the surrender value are met. Insurers have been providing such loans within one to two hours.
In order to get a loan against the security of the policy, the insured has to take the original documents of the policy and citizenship certificate to his insurers office.There is a facility to apply at any branch of the life insurance company. Some insurers have even provided the facility to register the application from the insurer’s website.

The Insurance Board has mentioned the method of calculating the surrender value in the life insurance policy directives. You can take a loan of 80 to 90 percent of the surrender value on the security of the life insurance policy you have purchased.

Since the interest on the policy loan is calculated on a semi-annual basis, interest should be paid in 6 months to avoid penalty. However, there is a facility to repay the principal amount by paying any amount within the insurance policy period when it is suitable for you. There is no obligation to pay an EMI of principal every month in an like in a bank. Among the life insurers, Nepal Life Insurance and Asian Life Insurance have the facility to pay the principal and interest amount of the loan directly online through Esewa or FonePay Apps.

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