Top Tips & Guide To Borrow Against Life Insurance Policy

Loan against insurance policy is a simple and instant method of meeting urgent finance requirements without losing your insurance plan. For an Indian, loan against insurance policy has the benefit of cash in hand within no time and holding on to their investment in insurance policy. It is, however, important to recall the important facts – such as eligibility, loan margin, rate of interest, and repayment period – prior to taking insurance policy loan facility.

This guide will walk you through the key considerations, advantages, and procedure of taking a loan against life insurance policy. It also explains issues like loan against life insurance policy interest rate that can double your cost of borrowing.

Loan against life insurance policy is a collateral loan backed by the cash surrender value of a life insurance policy. Policies of endowment, money back, or whole life with cash surrender value can avail this facility but term insurance policies cannot be offered this facility as they do not have the cash value aspect.

If you borrow such a loan, your insurance company pays you in cash at the surrender value of the policy. You pay back loan with interest or it gets deducted at maturity proceeds or death benefit.

Borrowing from life insurance policy is different from personal loans or any collateral-free loan in the sense that it would be lighter in interest charges and fewer documents and no credit check.

Eligibility and loan amount instead of insurance policy

Policy should already have matured for at least 3 years or lock-in period awarded by the insurer. Also:

Policy should be active with all premiums paid.
Policy surrender value should be high enough to cash in loan amount.
Loan will usually be the higher of 70% to 90% of surrender value depending on the insurer's regulations.

Assuming your policy surrender amount is Rs. 5 lakh, you can borrow Rs. 3.5 lakh to Rs. 4.5 lakh. Loan amount depends on the insurer, policy type, and tenor.

Principal advantages of availing the loan against the life insurance policy

There are numerous advantages of availing the loan against the policy:

Instant and easily accessible money: Less documentation and no time-consuming credit checks.
Low interest rates: Usually 9% to 12% annually, less than an ordinary unsecured personal loan.
No credit record effect: Since your loan is secured on your policy, there is no credit check.
Maintain policy benefits: Your policy remains in force and you keep bonuses or guaranteed additions.
Easy to repay: You repay the loan in lump sum or instalments as directed by the insurer.

This facility can be utilized best in a situation of emergency such as medical bills, study fee, or working capital requirements of a business.

Interest rate against life insurance policy

Interest rate against life insurance policy would largely be market and insurer determined. Insurers have 9% to 12% as an interest rate per year. The interest rate is compounded year by year but some insurers compound on monthly basis.

Principal facts about interest rates

Much lower compared to personal loans and credit card loans.
Additional interest on loan amount outstanding and amount repaid and compounded and amount outstanding unpaid.
The interest if not remitted will drain your policy's death or maturity amount.

Relative to other loans, the very subsidized rate of interest reduces the cost of the insurance policy loan. It never means that at any point the cost of interest will not be added.

Step-by-step guide for taking loan against insurance policy

Step-by-step procedure for taking loan against insurance policy is simple:

Make sure that policy has acquired surrender value and is not in lock-in period.
Call the insurer: Call the insurer or access their portal to apply for the loan.
Application and doc submission: It will primarily seek the policy documents, identity proof, address proof, and KYC information.
Sanction of loan amount: Your loan will be sanctioned by the insurer on the date of surrender value.
Loan disbursement: The loan amount is deposited into your bank account upon satisfactory verification (usually within a few working days).

No need to waste time on credit checks and no collateral as the security is the policy itself.

Repayment and impact of loan on life insurance policy

Flexibility of repayment is one of the biggest pluses of such a loan. You can repay the loan in any manner that you find convenient:

Single lump sum amount at a time.
Part payment or instalment.
No monthly instalments to be paid, but interest has to be paid irrespective of the mode of payment.

In the event of default in repayment of loan or interest, the insurer will reimburse the same from the maturity or death benefit. This will reduce your nominee's terminal benefits significantly.

Therefore, thoughloan against insurance policy is simple to procure, ensure that the loan is paid back at the right time so that money loss won't happen.

Instructions and precautions while taking loan against insurance policy

While taking loan, be careful and consider the following points:

Find cost of interest: Compare loan interest rate with the interest rate of life insurance policy and how it affects the total amount paid.
Loan margin confirmation: Ensure to get maximum loan available against your policy surrender value.
Repayment plan: Ensure neat repayment plan to avoid dilution of maturity benefits.
Don't cash policy: Borrowing is better than premature surrendering of the policy, i.e., relinquishing of benefits.
Compare with alternatives: Compare with alternatives at high interest rates before going ahead.
Visit the insurer: Be wary of terms, penalty, and tenure from your insurer.

These steps have you making an informed choice as you cash out from your life insurance fund.

Conclusion

Loan against life insurance policy is a simple way to meet your financial crises without having to surrender your policy cover. With lower loan against life insurance policy interest rate than almost all other unsecured loans, the facility offers cheap lending without blemishing your credit score. However, policy eligibility details, lending amount, interest calculation, and repayment period are a pre-requisite prior to application for the facility.

According to the illustrations and recommendations provided above, Indian policyholders can use the loan against insurance policy facility to maximum extent and will not lose the maturity amount of the policy or receive benefits. Thus, the finance facility is a favorable one in order to make the most of your life insurance at the time of cash requirement directly.