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Should you opt for a loan against your life insurance policy?

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When there is some form of financial stress and you want to overcome it, your life insurance policy can come in handy. Unbelievable, but it’s true. You can get a loan at affordable interest rates against your life insurance policy. For a loan against a life insurance policy, the policy itself acts as collateral or security. There are many benefits of a loan against a life insurance policy including easy loan availability, reasonable interest rates, flexible eligibility criteria, etc.

How does a loan against life insurance work?

It is important to remember that a loan is available only with insurance plans that offer cash value on maturity. One cannot source a loan against term insurance plans.

Some lenders may provide loans against ULIPs (Unit-Linked Insurance Plans). ULIPs are insurance plans which act as investment and also insurance solutions. When you make a premium payment for such insurance plans, a portion of it is allocated to investment in capital markets and the remaining goes towards insurance.

Why take a loan against a life insurance policy?

Investors often have the question of why opt for a loan against an insurance policy when there are many loan facilities available in the market? Here are some of the reasons why:

  • One of the primary reasons to choose a loan against life insurance is affordable interest rates. While sourcing any form of a loan, applicants always look for low-interest rates and a loan against an insurance policy comes with relatively lower rates. This is because the life insurance policy acts as collateral against the loan amount and lowers the lender’s risk.
  • Some of the other benefits include a higher loan amount, flexible eligibility criteria, and fast disbursal of the loan amount.

How much is the interest rate on a loan against a life insurance policy?

Here are some of the factors which affect the interest rates on loan against insurance policy:

  • Interest rates on loan against life insurance depend on the policy premium that has been paid. Also important is the frequency of premiums paid. Interest rates are often lower if a greater premium has been paid for an extended period. Interest rates on Loan against Life Insurance Policy usually range between 10% to 12% annually. These could differ across lenders.
  • While a poor credit score or absence of credit history may not necessarily lead to the rejection of such loans, a good credit score can influence the interest rates granted.
  • Lower interest rates help in easy loan repayment since the EMI will be far lower as compared to other high-interest rates loan facilities. Borrowers must note that a loan facility is not immediately available upon buying life insurance. There is usually a waiting period of 3 years before which lenders will not grant a loan amount against a life insurance policy.

How much loan amount can you get against a life insurance policy?

It is a common misconception that the loan amount against life insurance depends on the value of the life insurance policy. On the other hand, the loan amount depends on the surrender value of the life insurance policy. Surrender value is the value that a policyholder gets from the life insurance company if he or she exits the policy before the end of the policy term.

Lenders normally offer 80% to 90% of the total surrender value of any traditional policy as the loan amount. This could differ across lenders. In the case of a loan against ULIPs, the loan amount is decided as per the current market value of the policy and the type of fund.

Which type of loan is granted against a life insurance policy?

While applying for a loan facility against life insurance, applicants must be aware of the type of loan that can be availed.

There are two types of loan commonly offered by lenders – Term Loan and Overdraft.

  • In the case of term loans, applicants get the total loan amount in their account and the interest is charged on the total amount for a fixed duration.
  • In the case of an Overdraft loan facility, the interest amount is charged on the amount that the borrower uses.

Most lenders offer the overdraft facility when it comes to loans against the insurance policy. This helps borrowers to fulfil their needs by making use of only the amount required.

How to apply for a loan against your life insurance policy?

The application process for a loan against a life insurance policy is easy to follow and smooth. Here are the steps to be generally followed:

  • An applicant has to visit one of the nearest branches of the insurance provider.
  • The process involves basic KYC documents and a copy of the insurance policy.
  • The applicant then has to fill the application form and submit the necessary documents.
  • The documentation requirements may differ across lenders.
  • After the documentation, the lender authenticates all the documents.
  • In the last stage, the loan amount is deposited in the borrower’s bank account if all steps are appropriately followed and the borrower meets all eligibility criteria.

Final Thoughts

A loan against a life insurance policy can be an easy financing solution, especially when you need urgent finances. It is easy to avail of and comes with reasonable interest rates. You can explore loans against life insurance policy instead of opting for unsecured loans such as personal loans. However, remember that failing to pay back the loan will make you lose out on the benefits offered by the life insurance plan. So, ensure that you repay the loan on time and retrieve the policy so that you can continue enjoying the benefits and security offered by the plan.

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