IRDAI’s plan to prohibit use of critical illness policy as collateral for loan may affect nonlife industry

  IRDAI is exploring at prohibiting the use of critical illness policies as collateral against housing or vehicle loans.   It’s a common practice to have a life insurance or a critical illness policy as a collateral for securing a housing or a vehicle loan from various housing finance companies (HFCs) and non-banking finance companies (NBFCs). The insurance policy acts as a security for the lender as the claims from the policy can be used for repayment of the loan installments in case the policy holder loses his life.   Critical illness policies are issued by general insurance companies and they pay the insured individual a lump sum amount if diagnosed with any of the specific illnesses on a predetermined list. Any move from IRDAI to prohibit use of critical illness policies as collateral for securing loans may be negative for the general insurance companies selling these policies as it may impact their sales.   On the other hand, the move may be positive for life insurance companies as the policies sold by them will continue to have the advantage of being able to act a collateral for securing housing or vehicle loans.   It’s this reason why the General Insurance Council (GIC) has expressed its reservation on the regulators move.  According to letter written by GIC, critical illness covers are taken by people either to meet the treatment costs or to manage the life style even after diagnosis of a critical illness.