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Features
Ref. No. KLI/22-23/E-BB/492
A loan against insurance policy allows you to use your life insurance policy as collateral to help fund your needs without sacrificing coverage. Explore key factors to consider before taking a loan against policy.
A loan against insurance policy is when you use your life insurance policy as a security or “collateral” to get a loan. Since you are putting your policy up as a form of guarantee, the loan is considered “secured.” This means lenders are generally more comfortable offering loans with lower interest rates and a faster approval process, as they have a policy to rely on if you cannot repay the loan.
This can be a handy option, especially if you need cash quickly and do not want to deal with the hassle of traditional loans. Though, not every policy qualifies. For the ones that do, it is an efficient way to access funds without compromising on other assets or investments.
The process of taking a loan against insurance policy is pretty simple. All you have to do is ensure your eligibility criteria and, at the same time, know all the things related to the loan against the policy before you move ahead.
Let us understand the process of taking a loan against insurance before we move on to discuss the important things about it.
Before you apply for a loan against an insurance policy, you must check the eligibility of your loan to avail of it. Since only some life insurance policies are eligible for a loan, other factors like age, valid documents, credit score, etc., become key determinants.
Suppose you do not have a valid insurance policy against which you can take a loan; find one within your existing insurance portfolio. Insurance policies with a strong surrender value or significant maturity benefits usually have higher chances of loan approval.
Now that you have an insurance policy that allows you to take a loan against it, you must look for a trustworthy lender. While your insurance company might offer this option directly, you can also have the flexibility to work with different lenders. For this, make sure that you do your research and check for the best options available in the market. You must also keep a checklist ready for the loan lender’s benefits.
You can apply for a loan against insurance policy online or visit the lender’s office. However, you should only apply for such loans after thoroughly reviewing the loan documents and repayment criteria.
You cannot avail yourself of a loan against every type of life insurance policy. Hence, it is better to check with your insurance company before buying a plan. However, policies like whole-life policies, money-back policies, savings plans, and endowment plans provide a loan against a life insurance policy. Sometimes, a loan against the ULIP policy, also known as a Unit-Linked Insurance Plan(ULIP), can be taken depending on your insurer.
To ensure a smooth loan application process, it is crucial for you to have a clear understanding of the documents required to get a loan against your life insurance policy.
Given below are some important documents that you must have at the time of applying for a loan on insurance policy:
The primary document that you require to avail yourself of a loan against an insurance policy is the policy document itself. This document serves as proof of ownership and outlines the terms and conditions of the policy. It is essential to provide a clear and legible copy of the entire policy document, including all endorsements and amendments.
You will need to fill out the loan application form provided by your lender or insurance company. This form captures essential details about you, your policy itself, the loan amount requested, and the purpose of the loan. Make sure to complete this form accurately and comprehensively.
KYC documents are mandatory to comply with regulatory guidelines and verify your identity. These mainly include a copy of a government-issued photo ID (such as your driver’s license, passport, or Aadhaar card), proof of address (utility bill, rental agreement, etc.), and passport-sized photographs. These documents establish your identity and address.
To initiate the loan process, you need to assign the life insurance policy to the lender. This means transferring the policy’s rights and benefits to the lending institution for the duration of the loan. An assignment of the policy is usually irreversible and ensures that the lender has a claim to your policy’s proceeds in case of non-repayment.
The loan agreement is a legally binding document that outlines the terms and conditions of the loan, including the interest rate, repayment schedule, prepayment options, and any other relevant terms. Both you (the policyholder) and the lender sign this agreement, serving as a reference point throughout the loan tenure.
Lenders may require you to provide proof of premium payment history to ensure that your policy is in force and the premiums are up to date. Providing the latest premium receipts or statements is necessary to establish the policy’s active status.
Financial institutions usually request recent bank statements to assess your financial stability and repayment capacity. These statements provide insight into your income, expenses, and overall financial health.
Depending on the loan amount and lender’s requirements, you may need to submit income proof documents, such as salary slips, income tax returns, or audited financial statements (for self-employed individuals). This helps the lender evaluate your ability to repay the loan.
Using a life insurance policy as collateral for a loan offers various benefits, including the following:
Interest rates on this type of loan are much lower when compared to the interest rate levied on a personal loan since they are secured with your policy.
As the documentation is minimal, the disbursement of the loan is quicker, and limited application processing is required.
Since you hold an insurance policy against the loan, it is very less likely that your loan application will get rejected. It is inclined to get approved as long as you meet the basic eligibility criteria.
Unlike unsecured loans, there is a slim chance that your loan application will get rejected as you hold an insurance policy with the company.
As the insurance company has your life insurance policy as security against the loan, there is less scrutiny. This means the lenders will not delve too much into extensive checks on your financial background. Also, your CIBIL score is not closely examined for sanctioning the loan, which is beneficial if you have a low CIBIL score.
Individuals usually explore various ways to secure funds in times of financial need. One option that can provide a lifeline during such situations is taking a loan against an insurance policy. This financial solution allows you to borrow money against the cash value of your life insurance policies. However, before making this decision, you need to consider these important factors:
It is important to first ensure that your life insurance policy qualifies for a loan, as only certain types of policies are eligible. If you hold a life insurance plan or ULIPs (Unit Linked Insurance Plans), you can apply for a loan against an insurance policy. This is because, unlike traditional insurance policies, ULIPs offer life insurance coverage that provides investment options in areas like shares, stocks, and bonds. Plus, ULIP policies are considered the best option for taking a loan against a life insurance policy.
So, when you opt for a ULIP policy, other than getting the dual benefit of insurance and investment in one plan, you also get the feature of availing a loan against it. Therefore, if you plan to apply for a loan of this kind in the future, you must buy life insurance first.
For a loan against an insurance policy, the interest rate is charged depending on the interest rate applicable when taking the policy. You need to pay interest for six months even if you clear the loan within this time frame. However, the loan against insurance policy interest rate is generally more affordable than other types of loans. However, you are advised to check with your loan provider for a clearer picture of the loan against insurance policy interest rates.
The repayment period of a loan against an insurance policy is usually six months. However, the terms and conditions for repaying your loan may vary depending on your lender. For instance, some insurance providers do not require the borrower to pay the principal amount. Instead, they directly credit it from the policy value at maturity or claim, provided you pay the interest on time.
Additionally, timely repayment is highly recommended when taking a loan against a life insurance policy, even if you only have to pay the interest. This is important because your insurance policy works as collateral here, and failing to pay the loan might lead to bad repercussions.
Your life insurance policy acquires a surrender value if you have been paying your premiums on time for three years of buying the policy. The period for acquiring a surrender value may differ according to your insurer. But you cannot avail yourself of a loan if your policy has no surrender value.
The eligibility for a loan against insurance policy that you can borrow has to be checked with your insurer. The loan amount is a percentage of the surrender value, with the loan being up to 85-90% against traditional life insurance plans with guaranteed returns.
If you fail to repay the loan taken against the life insurance policy, the interest adds to the balance amount. If the amount borrowed for the loan against the insurance policy exceeds the insurance policy’s cash value, then this can cause the policy to lapse. The insurer will then have the right to recover the loan amount and interest from the surrender value of your policy and terminate the insurance policy.
A loan against insurance policy offers a practical solution for accessing funds without the high interest rates or extensive paperwork often associated with personal loans. However, before you opt for a loan against an insurance policy, you are recommended to speak to an insurance advisor to fully understand the terms and conditions before borrowing against life insurance or any other similar plans. This will make you well aware of the short-term and long-term risks, empowering you to make mindful financial decisions. Remember to evaluate your policy, compare lender offers, and be aware of any potential consequences if repayment is missed.
1
A loan against insurance policy is a financial arrangement where you can borrow money from a lending institution, using your life insurance policy as collateral. Instead of surrendering or terminating your policy, you can take out a loan against its cash value, which is the accumulated savings component of your policy.
2
When you take a loan against your life insurance policy, the insurer lends you a portion of the cash value that you have built up in the policy. The loan is repaid with interest, and if the loan is not repaid by the time of your death, the outstanding loan amount plus interest is deducted from the policy’s death benefit.
3
Borrowing against your life insurance policy can offer several advantages. It provides a source of quick and relatively easy access to funds without surrendering the policy. The interest rates on these loans are often lower than those of other types of loans. Additionally, the loan does not require a credit check, as the policy’s cash value secures it.
4
While there are benefits, there are also considerations. Taking a loan against your policy reduces the death benefit, potentially leaving your beneficiaries with a lower payout. If the loan and interest are not repaid, it can erode the policy’s value and coverage. Also, the policy’s growth potential may be impacted by the outstanding loan.
5
Repayment methods vary by policy and insurer, but typically, you have several options. You can make periodic interest payments to keep the loan balance from growing, or you can opt to pay back the entire loan amount at once. If you do not repay the loan, the outstanding balance plus accrued interest will be deducted from the policy’s death benefit when you pass away.
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Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Features
Ref. No. KLI/22-23/E-BB/2435
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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