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Loan Against Life Insurance Policy

In a loan against an insurance policy, the loan term remains the same as the policy term. Learn important factors to consider while taking a loan against your life insurance policy.

  • 54,351 Views | Updated on: May 22, 2024

You will often come across people talking about different types of loans in India, but rarely would you hear about a loan against the insurance policy. One primary reason for this unawareness is India’s insurance penetration, which is well below the global average.

In this article, we will help you understand all about borrowing against life insurance and loan against ULIP policy and the benefits you can avail yourself. It will also take you through details like the policies eligible for loans, interest rates for loans against insurance policies, and so on.

A loan against an insurance policy, also known as pledging, is an extremely popular concept abroad. Such loans are issued by the insurance companies themselves or any other financial institutions that provide loans against securities. This type of loan bodes well for loan seekers as you don’t have to provide any other assets as collateral. Therefore, instead of taking personal loans or loans against your credit cards, you can choose to borrow money using your life insurance policy. However, such loans are not available against term insurance policies or equity-oriented securities.

Steps to apply a loan against an insurance policy

Which Insurance Policies Are Eligible for a Loan?

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. But 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 Unit-Linked Insurance Plan (ULIP), can be taken depending on your insurer.

Documents Required for Loan Against Life Insurance Policy

To ensure a smooth loan application process, it is crucial for policyholders to have a clear understanding of the documents required for obtaining a loan against their life insurance policy.

Given below are some important documents that you must have at the time of applying for a loan against the insurance policy:

Life Insurance Policy Document

The primary document required for availing a loan against a life 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.

Loan Application Form

Every financial institution or insurance company providing loans against life insurance policies will require a duly filled loan application form. This form captures essential details about the policyholder, the policy itself, the loan amount requested, and the purpose of the loan. Make sure to complete this form accurately and comprehensively.

Know Your Customer (KYC) Documents

To comply with regulatory guidelines and verify the identity of the policyholder, KYC documents are mandatory. These typically include a copy of a government-issued photo ID (such as a driver’s license, passport, or Aadhar card), proof of address (utility bill, rental agreement, etc.), and passport-sized photographs. These documents establish the identity and address of the applicant.

Assignment of Policy Document

To initiate the loan process, policyholders need to assign the life insurance policy to the lender. This essentially means transferring the rights and benefits of the policy to the lending institution for the duration of the loan. An assignment of the policy is usually irrevocable and ensures that the lender has a claim to the policy’s proceeds in case of non-repayment.

Loan Agreement

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 the policyholder and the lender sign this agreement, and it serves as a reference point throughout the loan tenure.

Proof of Premium Payment

Lenders may require evidence of premium payment history to ensure that the policy is in force and the premiums are up to date. Providing the latest premium receipts or statements is essential to establish the policy’s active status.

Bank Statements

Financial institutions often request recent bank statements to assess the policyholder’s financial stability and repayment capacity. These statements provide insight into the policyholder’s income, expenses, and overall financial health.

Income Proof

Depending on the loan amount and lender’s requirements, policyholders 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 the applicant’s ability to repay the loan.

Loan Against Insurance Policy - Process & Steps Involved

The process of taking a loan against an 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 insurance 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.

Determine if Your Life Insurance Policy is Eligible For a Loan

Before you move ahead to apply for a loan against an insurance policy, you must check the eligibility of your policy for availing a loan against it. Additionally, other factors like age, valid documents, credit score, etc.

Find The Right Policy

If you do not have a valid life insurance policy for taking a loan against it, you might get one. Loan/credit can be a very useful resource in times of emergency. A loan against ULIP policy is one feature that makes ULIP a popular insurance policy in the market.

Finding The Right Lender

Now that you have an insurance policy that offers you to take a loan against it, you must look for a lender willing to give you a loan against the life insurance policy. You should ensure 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.

Applying Online or Visiting the Lender’s Office

You can apply for a loan against the 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.

What are the Benefits of a Loan Against Life Insurance Policy?

Borrowing life insurance offers a lot of benefits, including the following:

Lower Interest Rates

Interest rates on this type of loan are much lesser when compared to the interest rate levied on a personal loan.

Quick Disbursement

As the documentation is minimal, the disbursement of the loan is quicker, with limited application processing required.

Fewer Chances of Rejection

Unlike unsecured loans, there’s a slim chance that your loan application will get rejected as you hold an insurance policy with the company.

Fewer Chances Of Rejection

Unlike unsecured loans, there’s a slim chance that your loan application will get rejected as you hold an insurance policy with the company.

Less Scrutiny

As the insurance company has your life insurance policy as security against the loan, there is less scrutiny. Also, your CIBIL score is not closely examined for sanctioning the loan, which is beneficial if you have a low CIBIL score.

Things to Know Before You Decide on a Loan Against Insurance Policy

In times of financial need, individuals often explore various avenues to secure funds. One option that can provide a lifeline during such situations is taking a loan against an insurance policy. This financial solution allows policyholders to borrow money against the cash value of their life insurance policies. However, before making this decision, there are several important factors to consider.

Eligibility

People who hold a life insurance plan and ULIPs (Unit Linked Insurance Plans) can apply for this loan. Unlike traditional insurance policies, ULIPs offer life insurance covers that provide options to invest in areas like shares, stocks and bonds. Additionally, ULIP policies are considered the best option when it comes to taking a loan against a life insurance policy. 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 of 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.

Rate of Interest

For a loan against an insurance policy, the interest rate is charged depending on the interest rate applicable when taking the policy. The borrower has to pay interest for six months even if the loan has been cleared within this time frame. However, the loan against insurance policy interest rate is generally more affordable than that of other types of loans. Although, it is advised to check with your loan provider for a clearer picture regarding the loan against the insurance policy interest rate.

Repayment

The repayment period of a loan against a life insurance policy is usually six months. But the terms and conditions of repaying your loan may vary based 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 are paying the interest amount 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.

Surrender Value of Policy

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 doesn’t have a surrender value.

Loan Amount

The eligibility for a loan against an 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.

What Happens if You Fail to Repay?

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.

Wrapping Up

Before you plan to 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 prudent financial decisions.

Key takeaways

  • Policies like whole-life policies, money-back policies, savings plans and endowment plans provide a loan against a life insurance policy.
  • Every financial institution or insurance company providing loans against life insurance policies will require a duly filled loan application form.
  • Before you move ahead to apply for a loan against an insurance policy, you must check the eligibility of your policy for availing a loan against it.
  • Interest rates on this type of loan are much lesser when compared to the interest rate levied on a personal loan.

FAQs

1

What is a Loan Against Life Insurance Policy?

A Loan Against Life 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

How does a Loan Against Life Insurance Policy work?

When you take a loan against your life insurance policy, the insurer lends you a portion of the cash value you’ve 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

What are the advantages of taking a loan against my life insurance policy?

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

What are the potential drawbacks of a Loan Against Life Insurance Policy?

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. Additionally, the policy’s growth potential may be impacted by the outstanding loan.

5

How do I repay the loan on my Life Insurance Policy?

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 don’t repay the loan, the outstanding balance plus accrued interest will be deducted from the policy’s death benefit when the policyholder passes away.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

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.

Amit Raje
Reviewed By :
Prasad Pimple

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

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