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Life is full of surprises, and sometimes unexpected expenses or opportunities arise that require immediate financial support. Did you know that you can use your life insurance policy to secure a loan in such situations?
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Whether you're dealing with unforeseen costs, planning a major investment, or simply seeking a financial safety net, this blog will guide you through the process of borrowing against your life insurance policy, helping you make informed and empowered financial decisions.
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A loan against life insurance policy lets you borrow money from your insurer using the policy’s cash value as collateral. It’s unique because, unlike traditional loans, repayment isn't required, though interest will be charged. However, if you don’t repay it, the loan amount plus interest is deducted from the sum assured, reducing what your beneficiaries will receive. It’s a flexible way to access funds while keeping your life insurance policy in place.
You can get a loan against life insurance policy in the following ways:
Contact Your Insurance Company: Contact your life or term insurance provider and inquire about their policy loan options.
Understand Terms and Interest Rates: Learn about the loan terms, including interest rates and repayment conditions.
Determine Loan Amount: Decide how much you want to borrow based on your policy's cash value.
Complete Required Forms: Fill out the necessary paperwork and provide any requested documentation.
Repay the Loan: Make timely payments to ensure the loan doesn't affect your policy's benefits or coverage.
*Note: In case you have any queries regarding your life insurance plan or the loan you took against the plan, you can contact the insurance advisor to solve all your doubts.
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A life insurance policy not only protects your family's future and provides a favorable return on investment but has also become a flexible option, enabling policyholders to obtain loans. This feature is advantageous in times of financial strain, and the increasing popularity of these loans is attributed to their lower interest rates than personal loans. Additionally, the stability of the policy value, unaltered by market fluctuations, distinguishes it from loans against assets such as gold or shares.
Note: Check out the best term insurance plan in India and choose one that suits your requirements.
You can borrow loan against life insurance policy from most permanent insurance policies like whole life, universal life, or variable life insurance. These policies provide lifelong coverage and build cash value over time as you pay premiums. The cash value either earns interest or grows through investments, giving you the option to borrow against it.
In contrast, term life insurance doesn’t allow borrowing. It’s a more affordable option designed to cover you for a set period, such as during your working years, but it doesn’t accumulate cash value.
High Loan Amounts: You can borrow high loan amounts against your endowment or ULIP policies, catering to a wide range of financial needs.
Funding During Lock-In Period: You can get a loan against insurance policy even if it is still under the lock-in period, providing immediate liquidity.
Insurance Coverage Remains Intact: You can access funds without surrendering your policy, ensuring your insurance coverage and investment benefits continue.
Flexible Loan Options: Enjoy the flexibility of a loan against insurance policy like endowment or ULIP policies, with the ability to make multiple withdrawals and only pay interest on the amount used.
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.
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:
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.
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.
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.
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
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.
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.
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.
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.
The documents required to take a loan against life insurance policy are:
Passport-size photograph of the policyholder
Copy of Identification Proof, like Aadhar Card/Passport/Voter’s ID
Copy of PAN Card
Documents of the insurance policy
Bank Account Statement or a Copy of Canceled Cheque (as bank account proof)
Additional Documents, as asked by the insurer for verification
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.
†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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