The country’s largest insurer, Life Insurance Corporation (LIC), plans to enter the reverse mortgage space. LIC is in initial discussion with the housing finance regulator, National Housing Bank (NHB), for introducing this scheme to its clients, a senior official in the company said.
“Once we get clearances from within our organisation, we’ll explore opportunities with other banks and start offering this service,” he said.
Reverse mortgage is a financial product that enables senior citizens (60 plus) to mortgage their real assets with a lender and convert part of the equity into tax-free regular income. This saves them from selling assets in their life-time.
LIC’s entry in this segment is significant as the life insurer has a huge base. As per Insurance Regulatory Development Authority (IRDA) annual report, LIC alone has a 29% share in total new life insurance policies sold by all insurers in 2008-09.
So far, the tie-up between banks and insurance companies for reverse mortgage scheme has met with little success. NHB’s reverse mortgage loan-enabled annuity scheme (RMLeA) has only sanctioned 40 loans estimated at Rs 100 crore.
The scheme, without the life-long payment benefit was launched in 2007 and according to NHB around 7,029 loans amounting around Rs 1,408 crore have been sanctioned till March 31, 2010.
“It is expected that the modified scheme (RMLeA) that provides life-long annuity to the buyer and his or her spouse will catch up with the entry of LIC in this segment,” a finance ministry official said.
As per the existing scheme, LIC will provide payments in the form of annuity to the policy holder. “Once the assessed value of the house and the loan amount to be disbursed is decided, LIC will start making payments till the policy holder survives,” the official said.
The bank will make full payment of the total loan amount to LIC once the policy starts which the insurer can invest as per the company’s investment guidelines.
LIC’s real estate finance arm, LIC Housing Finance, is already offering the reverse mortgage scheme. “We can explore the linkages between the two companies. Since LICHF already has the product there is existing synergy,” a LICHF official said. As of now only Star Union Daiichi Life Insurance has a tie-up with Central Bank of India through which it offers the reverse mortgage.
The housing finance regulator is also battling hard to make the scheme popular it has also written to the finance ministry for providing tax exemption to the borrowers. Under the existing structure interest payable by the borrower (insurance companies) is treated as accrued interest and banks have to pay tax on this.