Life is full of surprises, and sometimes we face unexpected expenses or opportunities that require quick access to funds. Medical emergencies, education fees, home repairs, or business needs can come up without warning. In such situations, did you know you can leverage your life insurance policy to avail of a loan?
Whether you’re facing unexpected expenses, planning a significant investment, or need a financial safety net, read this blog to understand the ins and outs of availing a loan against your life insurance policy so that you can make an empowered financial decision.
What is a Loan Against Life Insurance Policy?
A loan against life insurance is a secured loan where you pledge your life insurance policy as collateral to get funds. The loan is backed by your policy’s surrender value or cash value, not the total sum assured.
The surrender value is the amount you would receive if you discontinued the policy before maturity. Lenders, including insurance companies, banks, and NBFCs allow you to borrow a certain percentage of this value, usually between 80% and 90%.
Which Policies Are Eligible?
Not all life insurance policies are eligible for loans. Here’s what you need to know:
Eligible Policies:
- Endowment policies
- Money-back policies
- Whole life insurance plans
- Unit-Linked Insurance Plans (ULIPs) – some lenders
Not Eligible:
- Term insurance policies
- Group health insurance policies
As per IRDAI guidelines, term insurance policies and unit-linked plans are generally not eligible for loans. However, traditional policies like money-back or endowment policies offer this facility.
Steps to Take a Loan Against Life Insurance Policy
Here is a step-by-step guide to follow while applying for a loan against an insurance policy:
Step 1: Check Policy Eligibility
Ensure you have the right life insurance policy before applying for a loan. Your policy must be approved by your chosen lender. Verify that your policy type qualifies for this facility.
Step 2: Determine Surrender Value
Verify if your policy has gained a surrender value by paying premiums for at least three years from the inception date. Only policies with a surrender value can be considered for a loan.
The policy should also have a track record of timely premium payments. This is crucial for lender approval.
Step 3: Calculate Loan Amount
The loan amount depends on the surrender value of your policy. Most lenders offer:
- Up to 80%-90% of the surrender value for traditional policies
- Up to 70%-75% of the paid-up value for ULIPs
- Some lenders may offer up to 95% depending on the policy type
Contact your insurance company or bank to ask about the eligible loan amount based on your policy’s surrender value.
Step 4: Find the Right Lender
Look for a lender who offers loan facilities against life insurance policies. You can approach:
- Your insurance company directly
- Banks like SBI, Bank of India, HDFC
- Non-Banking Financial Companies (NBFCs)
Explore their terms and conditions. Compare various options to find the most suitable one with:
- Lower interest rates
- Minimal processing fees
- Flexible repayment terms
Step 5: Complete the Loan Application
Apply for the loan by submitting the required documents. The application process is straightforward:
- Fill out the loan application form
- Provide policy details and the desired loan amount
- Submit all required documents
- Pay the processing fee (if applicable)
The insurance policy will act as collateral for the loan.
Step 6: Policy Assignment
When you take the loan, your policy is temporarily assigned to the lender as security. This means all rights on the policy will be transferred to the lender until you repay the loan.
Step 7: Loan Approval and Disbursement
Once your application is reviewed and approved, the loan amount will be credited to your bank account. The disbursement is usually quick:
- Within 24-48 hours for most lenders
- Some lenders may disburse on the same day
Documents Required
You need to submit the following documents to avail of a loan against life insurance:
Essential Documents:
- Original life insurance policy document
- Duly filled loan application form
- Deed of assignment
- Cancelled cheque or bank account proof
- Proof of premium payment
Identity and Address Proof:
- Aadhaar card
- PAN card
- Passport
- Voter ID
- Utility bills
- Rental agreement
Other Documents:
- Passport-size photographs
- Bank statement
- Income proof (salary slips or business financials)
- Loan agreement
Eligibility Criteria
Anyone can apply for a loan against insurance policy, as long as they meet the basic criteria:
Who Can Apply:
- Individuals
- Hindu Undivided Families (HUFs)
- Sole proprietorships
- Companies
- Partnerships
Age Criteria:
- Minimum age: 18 years
- Maximum age: 90 years
Employment:
- Both salaried and self-employed individuals are eligible
Policy Requirements:
- The policy should be at least 3 years old
- Minimum surrender value: โน25,000
- Timely premium payment track record
Interest Rates and Charges
Interest rates for loans against life insurance policies are typically linked to the base rate of the policy and premium paid.
Interest Rate Range:
- LIC charges around 9% per annum
- Banks charge between 10% to 13.15%
- Generally lower than personal loans
Processing Fees:
- Up to 3% of the loan amount or up to โน10,000 (including taxes)
- Some insurance companies may not charge any processing fees
Interest is calculated on a daily reducing balance, which means you pay interest only on the outstanding amount.
Repayment Options
Timely repayment is crucial during the policy term to avoid policy lapsing. You have flexible repayment options:
Payment Methods:
- Pay only interest monthly or half-yearly
- Pay both principal and interest as per your financial capability
- Bullet repayment (lump sum payment at maturity)
Important Points:
- If the policy is in a lock-in period, bullet interest payment is made upon completion of the lock-in period
- If the policy is out of the lock-in period, interest is payable monthly
- You can prepay or foreclose the loan without penalties in most cases
What Happens if You Don’t Repay?
If you default on the loan:
- The lender may foreclose your policy to recover dues
- The outstanding loan amount will be deducted from your policy benefits
- If the policyholder passes away during the loan tenure, the pending loan amount is deducted from the death benefit before it is paid to the nominee
Benefits of Availing a Loan Against Insurance Policy
Here are some of the prominent benefits of taking a loan against your policy:
- Lower Interest Rates: Unlike personal loans, loans against life insurance policies generally have lower interest rates, making them a cost-effective borrowing option. The rates are typically 2-4% lower than unsecured personal loans.
- Quick Disbursement: Owing to the minimal documentation and straightforward processing, the loan disbursement is faster and provides timely access to funds in times of need. Most lenders credit the amount within 24-48 hours.
- Streamlined Approval Process: As the life insurance policy secures the loan, borrowers experience less strict approval processes than unsecured loans. No credit score check is required in most cases.
- No Impact on Policy Benefits: Your policy and investment returns remain unaffected as long as you pay premiums on time. The insurance coverage continues without interruption.
- Flexible Loan Amount: You have the freedom to withdraw and repay funds as per your specific needs. Some lenders offer a pre-assigned loan limit customized to match the value of your pledged policy.
- Minimal Documentation: Only need to submit basic identity proof, address proof, bank account proof, and proof of insurance policy. The paperwork is much simpler compared to other loans.
- No End-Use Restrictions: You can use the loan amount for any purpose – medical emergencies, education, business needs, home repairs, or any other requirement.
Loan Against Insurance vs Personal Loan
Here’s how they compare:
| Aspect | Loan Against Insurance | Personal Loan |
|---|---|---|
| Collateral | Insurance policy is pledged as security | No collateral required |
| Interest Rate | Generally lower (9-13%) | Usually higher (12-18%) |
| Disbursal Time | Within 24-48 hours | Typically 2-7 days |
| Credit Score | Not required | Required |
| Processing Fee | Lower or nil | Higher |
| Approval Process | Easier | Stricter |
Things to Know Before Applying
Have a look at some important things to consider:
- Policy Must Have Surrender Value: Your policy should be at least 3 years old to have accumulated surrender value. Newer policies may not qualify.
- Impact on Death Benefit: If you pass away during the loan tenure, the outstanding loan amount will be deducted from the death benefit paid to your nominee.
- Risk of Policy Lapse: If you don’t repay the loan and continue to default, your policy may lapse, and you could lose all the benefits.
- Compare Lenders: Different lenders offer different interest rates and terms. Compare at least 2-3 options before deciding.
- Read Terms Carefully: Go through the loan agreement and repayment terms carefully before accepting. Understand all charges and conditions.
- Plan Your Repayment: Ensure you have a clear repayment plan. Don’t take more than you can comfortably repay.
Tips for Availing Loan Against Insurance
- Borrow Only What You Need: Don’t borrow the maximum available amount. Take only what you genuinely need to minimize interest burden.
- Keep Premium Payments Current: Continue paying your insurance premiums on time to keep the policy active and maintain your coverage.
- Repay as Soon as Possible: Try to repay the loan quickly to reduce interest costs and restore full control of your policy.
- Maintain Documentation: Keep all loan documents, payment receipts, and correspondence organized for future reference.
- Inform Your Nominee: Let your family or nominee know about the loan so they’re aware of the deduction in case of an unfortunate event.
Final Thoughts
Unlocking the potential of your life insurance policy to access a loan can be a game-changer in times of need. It offers quick access to funds at lower interest rates with minimal documentation and hassle.
By understanding the eligibility, benefits, and repayment process, you can gain the confidence to make savvy financial decisions and secure your future with ease. The process is straightforward – check eligibility, determine surrender value, calculate loan amount, find the right lender, and complete the application.
Remember that while this is a convenient option, it’s important to borrow responsibly. Ensure timely repayment to avoid policy lapse and maintain your insurance coverage. Use this facility wisely for genuine needs rather than discretionary expenses.
So, when in need, don’t let your policy sit there; explore the possibilities and embrace the financial flexibility it can offer! Your life insurance policy is not just protection for your loved ones – it’s also a financial asset that can help you during emergencies.
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Disclaimer: This blog is solely for educational purposes. The information provided is based on general guidelines and may vary across different insurance providers and lenders. Please verify all details with your insurance company or lender before applying for a loan. The securities/investments quoted here are not recommendatory. Always read the terms and conditions carefully and consult with a financial advisor if needed.
