Life Insurance Corporation has increased interest rates on loans against policies and thus shutting an arbitrage option for policyholders. The corporation has also increased interest rates on late payments of premiums. Up to now the LIC charged 9% on loans on policies that has increased to 10%
Interest rates have been mostly stable in the past few years. The policy conditions says that interest rates on loans would be changed from time to time. LIC easily allows loans to policyholders for up to 90% of the surrender value of the policy, including cash value of bonus. The only condition is that the policy need to be assigned in favour of the LIC.
The interest rates charged by LIC are less than the interest rates charged on loan against public provident fund scheme. Under the PPF scheme loans are offered at 2% more than the existing rate, which currently is 8.8%. Also under PPF the highest loan amount is 25% of the balance two years earlier.