In India, borrowing against insurance coverage is not particularly common. The fact that the majority of policyholders aren’t even aware of this alternative is one of the main causes of this. But because of the loan companies and their marketing initiatives, consumer awareness has significantly increased.
A life insurance policy serves as both a life insurance policy and a financial tool for corpus building. The advantages don’t stop there; policyholders can also borrow money against their life insurance policy to cover short-term expenses. When you take out a loan against a life insurance policy, your policy serves as security or collateral for the loan amount, but your insurance policy remains intact in case of emergencies.
In this post, we will help you understand all about borrowing against life insurance, and the benefits, eligibility, steps to apply, and more.
What Is a Loan Against Life Insurance Policy?
An arrangement known as a loan against an insurance policy allows a borrower to get financing by using the insurance policy as collateral with the insurance provider. The business reserves the right to keep the policy until the debt is fully recovered if the borrower is unable to repay the loan on time.
For those looking for loans, this form of loan is advantageous because no other assets are required as security. Therefore, you have the option of borrowing money from your life insurance policy rather than taking out personal loans or credit card loans. These loans, however, cannot be secured by equity-oriented instruments or term insurance policies.
What Is The Eligibility Criteria For a Loan Against A Life Insurance Policy?
To apply for this secured loan, you will need to submit the following important personal loan documents:
- Duly Filled application form along with passport-sized photographs
- Original policy document
- Proof of Identity: Aadhaar Card, Passport, Voter ID Card, Passport
- Proof of Residence: Aadhaar Card, Voter ID Card, Driving License, Utility Bills (water or electricity).
- Proof of Income: Salary Slips, Bank Account Statement.
- Any other document required by your life insurance service provider.
Why Should You Go for a Loan Against Life Insurance Policy?
You must be wondering why you should choose a loan against your life insurance policy when you have access to so many other borrowing options. Several factors make this loan option appealing to and well-liked by those in need.
- Lower interest rates: The reduced interest rate compared to other financing choices is one of the biggest advantages of these sorts of loans.
- Quick disbursement: The loan disbursement is quicker with less application processing because this loan type requires less documentation.
- Instant approval: Based on the surrender value of your policy, you can also receive immediate loan approval. This means that the maximum loan amount you can get is between 85% and 90% of the surrender value of your insurance policy.
- Fewer chances of rejection: Since you have an insurance policy on file with the lender as security, secured loans are less likely to be denied than unsecured loans.
Steps To Apply For a Loan Against Lnsurance Policy
Taking out a loan against an insurance policy is a fairly easy process. Before proceeding, all you need to do is confirm that you meet the eligibility requirements and, at the same time, learn everything there is to know about the loan against the insurance policy. The processes for applying for a loan secured by the insurance policy are listed below.
- Determine If Your Life Insurance Policy is Eligible for a Loan
Before proceeding to apply for a loan against an insurance policy, you must first determine whether your policy qualifies for such a loan. In addition, there are additional considerations like age, legal documentation, credit score, etc.
- Discover the Ideal Policy
You might acquire a valid life insurance policy if you don’t already have one to borrow money against it. A loan or credit can be a very helpful tool in an emergency. One element that makes ULIP a well-liked insurance policy on the market is the ability to borrow money against one.
- Finding the Right Lender
You need to find a lender ready to give you a loan against the life insurance policy now that you have an insurance policy with a loan option. Make sure you conduct thorough research and look for the greatest solutions on the market. A checklist for the benefits of the loan lender must also be kept on hand.
- Applying Online or Visiting the Lender’s Office
Online or in-person applications for loans secured by insurance policies are both accepted. However, you must carefully check the loan documentation and payback requirements before applying for one of these loans.
5 Things You Should Know Before Applying for a Loan Against your Life Insurance Policy
The following are the things that you should consider before applying for a loan against your life insurance policy.
Those who own unit-linked insurance plans (ULIPs) and life insurance are eligible to qualify for this loan. ULIPs provide life insurance coverage with choices to invest in things like shares, stocks, and bonds, in contrast to typical insurance policies. ULIP policies are also thought to be the ideal choice when taking a loan against a life insurance policy. In addition to receiving the benefits of both insurance and investment in one plan when you choose a ULIP policy, you also have the option of taking out a loan against it. Therefore, you must first get life insurance if you intend to apply for a loan of this type in the future.
- Rate of interest
In comparison to other unsecured financing choices, this sort of loan has a relatively lower interest rate. The interest rate on these loans is determined by the market rates in effect when the policy was purchased. For loans secured by insurance policies, interest rates are typically around 10% p.a. Therefore, you must verify this before choosing to borrow money from your policy.
- Surrender Value of your Policy
Additionally, keep in mind that even if your policy has been pre-approved for a loan, you can only use this facility if your policy has accrued a Surrender Value. You must consistently pay your required premiums for at least three years from the policy’s start date for your insurance to achieve a Surrender Value.
A loan secured by a life insurance policy typically has a six-month repayment period. However, depending on your lender, the terms and conditions of repaying your loan may change. Some insurance companies, for instance, do not demand that the borrower pay the principal. As long as you are paying the interest amount on time, they will instead immediately credit it to the policy value upon maturity or upon making a claim.
Furthermore, even if you simply have to pay the interest when taking out a loan against a life insurance policy, prompt repayment is strongly advised. This is crucial since your insurance policy serves as collateral in this situation, and defaulting on the loan could have negative consequences.
- Loan Amount
You must check with your insurer to see if you qualify for a loan secured by an insurance policy. When compared to conventional life insurance plans with guaranteed returns, the loan amount can range from 85 to 90 percent of the surrender value.
What Happens if You Fail to Repay the Loan?
If you don’t pay back the loan you took out against your policy, interest will keep accruing. Your insurance policy may lapse if the loan balance is higher than the surrender value or cash value. The insurer has the option of canceling your insurance plan and recovering the loan balance and interest from the surrender value of your policy.