IRDAI may not ban but may tweak sale of credit-linked health policies

IRDAI may not bring a blanket ban or prohibition on the sale of credit-linked health insurance products. Instead, IRDAI may consider tweaking the mechanism in which credit-linked health insurance products are sold in the country, the sources said.

It’s a common practice to have a life insurance or a credit-linked health insurance policy like a critical illness policy as collateral for securing a housing or a vehicle loan from any housing finance company (HFC) or a non-banking finance company (NBFC).

The insurance policy acts as security for the lender as the claims from the policy can be used for repayment of the loan instalments in case the policyholder loses his life during the loan repayment duration.

According to the sources, IRDAI may mandate general/standalone health insurance companies to charge a premium on credit-linked policies based on Diminishing Sum Assured basis. What this means is that the sum assured and the premium charged on a credit-linked policy should come down as the policyholder repays his loan instalments.

Currently, general/standalone health insurance companies continue to charge premium on the original sum assured which is fixed when the loan is taken, irrespective of payment of loan instalments falling.

To simply explain this, if an individual takes a home loan of Rs 1 crore, then the sum assured on the credit-linked health insurance policy put against  the loan would also be equivalent to the loan amount, which is about Rs 1 crore.

He is charged a premium of 0.2-0.25 percent premium, which means Rs 20,000-25,000 annually on the policy. Assuming he pays Rs 30 lakh out of the total loan amount of Rs 1 crore over the next three years, his sum assured still remains the same and hence the premium continues to be charged on that sum assured.

Under the new Diminishing Sum Assured model, if the individual pays 30 lakh over three years out of his total loan of Rs 1 crore then the sum assured would also reduce by Rs 30 lakh and the premium (0.2-0.25 percent) would be charged on the balance Rs 70 lakh.

Most industry experts suggest that though the tweak is negative for the general insurance industry, it is still better than a complete ban/prohibition on credit-linked health insurance products.