Life Insurance Corporation has increased interest rates on loans against policies thereby shutting an arbitrage opportunity for policyholders. The
corporation has also increased interest rates on delayed payments. Until recently the corporation charged 9% on loans against policies. This provided policyholders an opportunity to earn a spread by borrowing from LIC and parking funds in fixed deposits of triple A 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, 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.
Similarly in the case of interest of delayed payments, LIC has hiked interest charges to 10%. Earlier the corporation was charging 8% interest.