How to Get a Loan Against a Life Insurance Policy?

What is a Loan Against Life Insurance Policy?

A loan against a life insurance policy lets you borrow money from your insurer using the policy's cash value as collateral. It's different from regular loans because you don't have to pay it back, but you will have to pay interest. But if you don't pay it back, the loan amount plus interest will be taken out of the sum assured, which will lower what your beneficiaries get. It is a flexible way to get money without having to cancel your life insurance policy.

How To Take a Loan Against a Life Insurance Policy?

Follow the steps below to get a loan against your life insurance policy:

• Get in touch with your insurance company to find out about policy loan options.

• Fill out the required forms and send in any requested documents.

• Find out about the loan terms, the interest rate, and the repayment process.

• Decide how much you want to borrow based on your policy's cash value

• Make sure to pay on time so that your policy's benefits or coverage don't change.

*Note: If you have any questions about your life insurance policy or the loan you took out against it, you can call the insurance advisor to get answers.

How a Life Insurance Loan Works?

A life insurance policy not only protects your family's future and gives you a good return on your investment, but it has also become a flexible option that lets policyholders get loans. This feature is helpful when money is tight, and more and more people are getting these loans because their interest rates are lower than those of personal loans. Also, the fact that the policy value stays the same even when the market changes sets it apart from loans against assets like gold or stocks.

Note: Check out the best term insurance plan in India and choose one that suits your requirements.

What Types of Life Insurance Policies Can You Borrow From?

You can borrow from permanent life insurance policies that build cash value, like Whole Life and Universal Life, as well as Endowment and Money-Back plans. These loans use your own money, don't require a credit check, and stay active as long as the loan plus interest doesn't go over the cash value. If you don't pay them back, the death benefit will be less. 

On the other hand, term life insurance policies do not offer a loan facility, as they do not provide a maturity value.

What are the Features of Loan Against Life Insurance Policies?

• High Loan Amounts: You can borrow a lot of money against your ULIPs or endowment policies.

• Getting Money during the Lock-In period: Even if your policy is in its lock-in period, you can still get a loan against it. You will still be covered by insurance even if you take out money.

• You will still have insurance coverage even if you take out cash.

• Flexibility: The flexible loan feature lets you borrow money through an insurance policy, like an endowment policy or a Unit Linked Insurance Plan. You can also take money out of the policy multiple times and only pay interest on the amount you take out.

• Interest Payment Post Lock-In Period: For loans during the lock-in period, you can repay the principal and interest together once the lock-in period is over.

• Pre-Approved Loan Limits: Loans range from small to large amounts to fit the varying needs of policyholders, with loan amounts up to 90% of the policy's surrender value.

• Flexible Prepayments: You can prepay or foreclose your loan at any time without additional charges.

• Minimal Documentation: The loan application process is simple, requiring only basic ID, address proof, bank details, and insurance policy documents.

What Are Some Points To Keep In Mind While Taking A Loan Against Life Insurance Policy?

A loan against life insurance policy is a worthwhile alternative option to take out a personal loan. Nowadays, availing loan against your life insurance policy is one of the preferred approaches to meet all the emergency expenses. It is a hassle-free solution that offers several advantages over other traditional loan types. 

There are several factors that one needs to bear in mind before opting for a loan against a life insurance policy:

• Eligibility of Policy
  Before applying for a loan, confirm if your policy qualifies, as not all policies do. You can borrow against the surrender value of permanent or whole life insurance, but not term life insurance. When borrowing, you're essentially using your own money, with no need for explanations or a strict approval process. While income isn’t a factor, your creditworthiness is considered. Always review your policy's terms to check eligibility.

• Loan Amount
  You need to check the amount you are eligible for, with the insurance company or the bank. The loan amount is a percentage of its surrender value. Once the loan amount is decided, then the policy is assigned to the lender. This means that all rights of the policy are transferred to the lender, and the loan is sanctioned to the borrower thereafter. Furthermore, since the loan amount is not recognized as income by the Income Tax authorities, it is not taxable.

• Interest Charged
  The interest rate charged in case of a loan against an insurance policy is based on the premium already paid and the number of premiums that have been paid. The more the premium amount and number of premiums paid, the lower the rate of interest charged. In most instances, banks link the rate of interest with their base rate.

• Waiting Period
  A policyholder can't avail loan against the base life insurance policy as soon as he/she buys it. A waiting period of approximately 3 years is required. In this, the lender checks that premiums have been paid or have defaulted during the waiting period i.e., of 3 years. So, the loan is allowed based on surrender value.
  Best term Insurance Plans in India

• Premiums
  Upon taking a loan against a life insurance policy, policyholders need to continue paying premiums. In such an event where the policyholder desists from doing so, some insurers may terminate the policy. You can use a term insurance premium calculator to get the estimate premiums you would need to pay for the desired cover.

• Repayment of Loan
  A loan against a life insurance policy should be repaid during the policy term. You can repay both the principal and interest or just the interest. If only the interest is paid, the principal will be deducted from the claim amount. If the policyholder passes away before repaying, the dependents will receive a reduced payout.

• Deed of Assignment
  The insurance policy must be assigned in favour of the lending institution or insurance company, as applicable. The policyholder is required to execute the assignment deed in the prescribed format, and the assignment details are officially endorsed on the policy document.

• Charges
  The insurer or any financing institute may charge a low loan processing charges for the loan disbursal.
  *Note: It is recommended that you first know what is term insurance and understand its features, benefits and exclusions before you buy term plan or get loan against life insurance policy.

What Are The Documents Required To Take A Loan Against Life Insurance Policy?

To get a loan against a life insurance policy, you need to show these documents:

• A passport sized photograph

• A copy of your ID, like your Aadhar Card, Passport, or Voter's ID

• A copy of the PAN card

• Insurance policy papers 

• A bank statement or a copy of a canceled check (as proof of a bank account)

• More documents, as the insurance company asked for to confirm

What Are the Risks of Taking a Loan Against Life Insurance?

• Your family may receive less money
  If the loan isn't paid back, the insurer takes the loan amount plus interest out of the amount that is guaranteed. This directly lowers what your nominee will get later.

• Interest keeps piling up
  At first, the interest may seem easy to handle, but if you don't pay it on time, it builds up. Over time, it can take away a lot of the policy's value.

• The policy could end
  You still have to pay your premiums on time. The policy can end if premiums stop and the loan plus interest goes over the surrender value. At that point, both savings and insurance are in danger.

• Returns go down
  The amount you borrow stops getting bonuses or growing as an investment. This can make maturity benefits much lower in long-term policies like endowments or ULIPs.

• Access that is too easy can cause delays
  A lot of people keep putting off paying back because there isn't a strict schedule for doing so. What was supposed to be a short-term loan turns into a long-term debt without anyone noticing.

Wrapping It Up!

A loan against life insurance might be a lifesaver for most people and one can have long-term plans for his/her family to fulfill their short-term objectives and financial requirements. In addition to this, one should always be aware of the risks and make an informed decision based on that.

Note: You should also check the benefits of term life insurance if you are planning to purchase the term insurance plan.

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