What is a Loan Against Life Insurance Policy?
A loan on life insurance policy is when you use your life insurance policy as 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.
Benefits of a Loan Against Life Insurance Policy
Using a life insurance policy as collateral for a loan offers various benefits, including the following:
Lower Interest Rates
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.
Quick Disbursement
As the documentation is minimal, the disbursement of the loan is quicker, and limited application processing is required.
Fewer Chances of Rejection
Since you hold an insurance policy against the loan, it is very unlikely that your loan application will get rejected. It is inclined to get approved as long as you meet the basic eligibility criteria.
Fewer Chances Of Rejection
Unlike unsecured loans, there is 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. 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.
Eligibility Criteria For Loan Against Insurance Policy
You cannot just borrow against any savings plan. Term insurance, for example, typically does not qualify because it does not build up a cash value. You will want to double-check with your specific provider, but generally, you are in the clear if you have a whole life policy, a money-back policy, or an endowment plan.
These plans accumulate value over time. In some cases, depending on who your insurer is, you might even be able to borrow against a Unit-Linked Insurance Plan (ULIP).
Documents Required for Loan Against Life Insurance Policy
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:
Life Insurance Policy Document:
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.
Loan Application Form:
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.
Know Your Customer (KYC) Documents:
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.
Assignment of Policy Document:
This is a specific legal form where you assign the rights of your policy to the lender for the duration of the loan. It is usually irreversible until the debt is settled.
Loan Agreement:
This legally binding paper lays out the interest rate, how you will pay it back, and the fine print. You and the lender both sign this; it is your rulebook for the loan term.
Proof of Premium Payment:
Lenders need to know the policy is active. A lapsed policy is worthless as collateral. Showing your latest premium receipts proves you are up to date.
Bank Statements:
Most institutions will ask for a peek at your recent bank statements. They just want to gauge your financial health and ensure you have the capacity to handle the interest payments.
Income Proof:
Depending on the size of the loan, you might need to show salary slips or tax returns (ITR). This helps the lender figure out if the loan amount is realistic for your income level.
Step-by-Step Guide to Apply for Loan Against Insurance Policy
The application is simple, but following the right order saves time. Here is how the process usually looks, whether you are doing it offline or online:
Check Your Surrender Value:
Before applying, contact your insurer to find out the current surrender value of your policy. Your loan amount depends entirely on this figure (usually 80-90% of it).
Submit the Application:
Visit the branch or the insurer’s online portal. Fill out the application form with your personal details and the policy number.
Provide Documentation:
Submit the KYC documents, the original policy bond, and a cancelled cheque for the bank account where you want the funds deposited.
Policy Assignment:
You will sign a deed of assignment. This formally notes that the insurer/lender has a claim on the policy until the loan is repaid.
Verification and Disbursal:
The insurer verifies your documents and the policy status. Once cleared, the loan amount is directly credited to your bank account. This can often happen within a few days.
Things to Know Before You Decide on a Loan Against Insurance Policy
When the bills are piling up, a loan against your insurance feels like an easy fix. And it often is. You are borrowing against your own cash value, after all. But before you dive in, there are a few nuances you need to understand so you do not accidentally wreck your future coverage.
Eligibility
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 plans 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.
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. 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.
Repayment
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.
Surrender Value of Policy
Your life insurance policy acquires a surrender value if you have been paying your premiums on time for three years after 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.
Loan Amount
The eligibility for a loan against an insurance policy that you can borrow from 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
Taking a loan against your insurance policy is a practical way to get funds without the high costs of personal loans. It cuts through the red tape and leverages an asset you already own. However, it is not a decision to make blindly. Speak to an advisor. Make sure you understand how the loan affects your death benefit and what the repayment schedule looks like. Smart borrowing is about solving a short-term problem without creating a long-term risk for your family.
FAQs on Loan Against Life Insurance Policy
1
What is a Loan Against Life Insurance Policy?
A loan against insurance policy online 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 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
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. Also, 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 do not repay the loan, the outstanding balance plus accrued interest will be deducted from the policy’s death benefit when you pass away.
