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In India, taking a loan against an insurance policy isn't widely known, primarily due to low awareness among policyholders. However, increased marketing efforts by loan providers have improved consumer awareness. Nowadays, life insurance policies offer more versatility, extending beyond protection. Policyholders can now utilise their life insurance policies to secure loans during financial crises. Let us take a look at the loan against life insurance feature of life insurance.
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A Loan Against Life Insurance Policy is a financial option where policyholders can borrow funds from their life insurance plans, primarily whole life or endowment policies, by using the policy’s accumulated cash value as collateral. Simply put, these are the financial securities you can utilise as collateral to opt for a loan.
Term Plans
No, term insurance plan are not eligible for opting loans, as per IRDAI. However, you can avail of a policy loan against life insurance policy, such as endowment policies, whole life insurance plans and money-back policies.
Instead of the policy’s total sum assured, the surrender amount is considered for availing such loans. The surrender amount is acquired only in case of paying a premium for plans for at least 3 years. Most banks provide 80% to 90% of the surrender value as an insurer’s loan.
Taking a loan against your life insurance policy can provide you with the following benefits:
Banks do not check CIBIL scores when sanctioning loans against insurance. Therefore, this option is very useful for people with low CIBIL scores as you can get a loan without hassles.
Loan against insurance is one of the best alternatives to personal loans. On average, interest rates on a personal loan vary between 12% and 24%, whereas the interest rate on a loan against life insurance is much lower.
The documentation is minimal, and there are fewer chances of rejection. As a result, the loan gets sanctioned rather quickly.
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The maximum loan amount depends on the type of life insurance policy and its surrender amount. The loan amount is generally a percentage of the policy’s surrender value. The loan amount can go as far as 80 -90% of the surrender value in the case of endowment or money-back plans. Various insurers consider around 50% of the total premium paid to compute the maximum loan amount.
The interest rate for a loan against insurance depends on the amount and installments of premiums paid. The higher the premium amount and installments, the lesser will be the interest rate. Usually, banks link the interest rate with their base rate. Life Insurance Corporation of India charges 9%, to be paid half-yearly, whereas Bank of India charges 13.15%.
The main eligibility criteria are to ensure that the type of life insurance plan you buy should be approved by your chosen lender for a loan. This facility loan is available to companies, partnerships, sole proprietorships and Hindu Undivided Families (HUF).
In the case of ULIPs, a loan against the life insurance plan is usually offered up to 70%–75% of the paid-up value. In traditional policies, it can go up to 85%–90%.
The insurer will give you a repayment schedule, though you can pre-pay or foreclose the loan without any charges. Repayment clauses vary from one insurer to another. If the insured fails to repay the loan, the policy will lapse.
Any default in loan repayment can have a huge impact on the policy benefits. If the insured dies without repaying the loan, the insurer will provide death benefits to the beneficiaries after deducting the due amount and interest rate. If you fail to repay, the loan amount will increase due to the compounding effect, and the unpaid amount will be added to the outstanding principal amount. The policy is terminated when the outstanding premium and interest amount equals the surrender value. In this case, the policyholder will lose the insurance coverage.
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
The biggest drawback in taking a loan against your life insurance policy is that if the policyholder dies during the term of the policy, the nominee will not get the full policy benefits. The lender will deduct the outstanding loan and interest before paying to beneficiaries.
The first step is to ask the insurance company or the bank about the eligible loan amount. The next is applying for the loan and assigning the policy to the insurance company/bank. It means all rights on the policy will be transferred to the lender. Then, mention the policy details and the loan amount in the lender's format. Banks charge processing fees and other charges in addition to the interest rate. The loan may be sanctioned in 2–3 days; however, it may vary from one company to another. Once the loan is sanctioned, all rights on the policy are automatically transferred to the lender after the loan disbursement. Upon loan repayment, the lender will reassign the policy to an insurer by an endorsement.
You need to submit the following documents to avail of a loan against life insurance:
Original Insurance Policy
Deed of Assignment
Cancelled Cheque
While the protection cover provided by a life insurance policy is its important benefit, the facility of loan is valuable additional benefit. Always go through the terms and conditions of the bank before applying for a loan against life insurance policy to avoid discrepencies in long time.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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