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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.

  • Jun 17, 2022

You will often come across people talking about different types of loans in India, but rarely would you hear about a loan against insurance policy. One primary reason for this is unawareness, and the other 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 for yourself. It will also take you through details like the policies eligible for loans, interest rates for loan against insurance policy, and so on.

Steps to apply a loan against an insurance policy

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.

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 policy, money-back policy, savings plan and endowment plan 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.

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 insurance policy before you move ahead.

Let’s understand the process of taking a loan against insurance before we move on to discuss the important things about it.

Steps to apply for a loan against insurance policy

Determine if your life insurance policy is eligible for a loan

Before you move ahead to apply for a loan against 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 don’t 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 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 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 Loan Against Life Insurance Policy?

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

I. Lower Interest Rates

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

II. Quick Disbursement

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

III. 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.

III. 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.

IV. 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 for a Loan against Insurance Policy

I. Eligibility

People who hold a life insurance plan and ULIPs (Unit Linked Insurance Plans) can apply for this loan. Unlike the 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 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.

II. 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 insurance policy interest rate.

III. Repayment

The repayment period of loan against 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 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.

IV. 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

V. 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.

VI. 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 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.

VII. What Is the Drawback of Availing Loan Against Insurance Policy?

The drawback of a loan against a life insurance policy is that in the event of your death, the beneficiary will receive the death benefit but will not be able to recover the entire policy amount. The insurer will deduct the outstanding loan amount and interest before paying the death benefit.

VIII. How to Apply for a Loan against Life Insurance Policy?

Applying for a loan may differ from one insurance company to another. But you can contact your insurer to inquire about the policy’s surrender value, the eligible loan amount, and the terms and conditions related to this feature.

IX. Documents

To avail yourself of this loan, you need to fill out a loan against insurance application form, which needs to be accompanied by the original insurance policy document. You will also need to attach a copy of a cancelled cheque and a payment receipt for the loan amount.

Thus, before you plan to opt for a loan against 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.

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Ref. No. KLI/22-23/E-BB/2435


- A Consumer Education Initiative series by Kotak Life

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