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Rule 19 (a) to (f) of the Provident Funds Rules [of India ]
provides for ‘Financing of member’s life insurance policies’. Readers are
advised to read and understand the rule.
Here the proposer submits his proposal to the life insurance
company and the payment of premium is shown as financed from provident fund.
The necessary forms are submitted. After underwriting if the insurer decides to
accept the proposal he sends a request to the authority in charge of the PF of
the proposer (like Account General (in case of state government), Trustees of
PF Trust (in case of own PF Trusts of companies such as SAIL). The proposer
submits this request along with a non-refundable loan request to the authority.
The authority sends the amount of premium to the insurer directly, showing this
as a non-refundable loan of the proposer. The policy is simultaneously assigned
to the AG or PF Trustees.
Every year the policyholder shall submit a non-refundable loan
application to the PF authorities along with premium notice. If this is not meticulously
done and followed up the policy will lapse and PF will lose the amount of
premium.
PF grants compound interest to subscribers. If the term of the
policy is long the bonus from the policy may be less than the compound interest
income. Hence it may prove to be a loss to the policyholder.
But it has some advantages. The proposer does not feel any burden
of payment of premium. There is no recovery for premium. On one recovery for PF
he gets both PF benefit as well as life insurance benefit. Secondly if the term
of the policy is kept short bonus may be more than interest. On maturity of the
policy the claim is paid to PF. This will fetch more interest for the
policyholder. Thirdly, accident benefit, permanent disability benefit, critical
illness benefit etc will be available to the employee through the policy, which
will not be available if the money is kept in PF. Fourthly, there is a limit
for granting refundable PF loans, such as six times the salary or 90% of
contributions, whichever is less. Most senior employees have crossed this
limit. That is, funds beyond this in PF is beyond his reach and part of this can be transferred as
premium on short term policies. Fifthly since PF financed policies are always
of ‘yearly mode of premium payment’ the tabular premium gets rebate of 3% (in
case of LIC policies).
On premiums paid from PF no second time Income Tax benefit will be
available.
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