What is a Loan Against Insurance Policy?
A loan against an insurance policy is a way to borrow money using your active life insurance policy as security. This type of loan doesn't require any other collateral and is available on many traditional life insurance plans.
When there is financial requirement,it's a wise financial choice because approval is typically swift and isn't based on your CIBIL score.Because of this, policyholders who require temporary assistance in terms of funds can benefit from loans secured by their insurance.
How Does a Loan Against an Insurance Policy Work?
A loan against insurance policy works differently from regular bank loans. When you take out atraditional life insurance plan, like an endowment or money-back policy, it builds a surrender value over time. ULIP Plans are not eligible for loans through the Life Insurer.. After a few years, this value becomes eligible to be used as security for a loan. You don't sell the policy; you just use it as collateral.
Many insurers offer this loan facility through a simple process. Here’s how it usually works;
- Eligibility check: Your policy must have a built-up surrender value for applying for the loan.
- Apply online or visit the Insurer’s branch office: No need for lengthy documentation .
- Receive the loan: Funds are usually disbursed within a few working days.
- Repayment terms: You're free to repay anytime during the tenure. However, regular interest payments are usually required to keep the policy in force.
By using this option, you can access funds while keeping your life insurance plan active, which is one of the key benefits of a loan against insurance.
Top benefits of loan against insurance policy
Taking a loan against an insurance policy can be beneficial for various reasons, some of which are stated below2:
1. Affordable Rates of Interest
One of the top benefits of loan against insurance policy is the affordable interest rate. You can get a pocket-friendly interest rate which makes the loan repayment easy and affordable.
2. Quick Access to Funds
Another benefit of taking a loan against your insurance policy is its instant disbursal and quick access to funds. As the funds are disbursed based on the surrender value of your policy, the process is simple and quick, and you can get the money instantly during emergencies or when immediate financial assistance is needed.
3. No Requirement of Credit Check/Report
Loan against your insurance policy is beneficial for individuals having low credit or no credit score. Individuals who cannot avail the traditional loans due to low credit scores can easily do so by taking a loan against their insurance policy which does not require any credit check. Insurers lends the money based on the surrender value of your policy.
4. No Repayment Schedule
Loan against your insurance policy offers flexible repayment terms compared to traditional loans. You are not required to repay the loan as per a specified repayment schedule and get the flexibility to repay the amount at your own pace, subject to timely interest payments to keep the policy in force. This is yet another one of the exciting benefits of taking a loan against your insurance policy. Further, if the total amount of the loan including the loan principal and the outstanding interest, exceeds the surrender value of your insurance policy, it may lead to foreclosure (for lapse paid up policy) and cessation of the insurance coverage.
Loans against your insurance policy neither check your credit score for eligibility nor affect it in any manner. These loans are not based on your credit history or creditworthiness and are paid based on your insurance policy2.
5. Continued Insurance Coverage
One of the most attractive benefits of taking a loan against insurance is that you don’t lose your insurance coverage. You can enjoy all the benefits of your insurance coverage alongside availing the loan against your policy. Your insurance policy continues to be in effect during the loan tenure, ensuring that your loved ones remain protected1.
6. No Need for Collateral
Loans against an insurance policy are secured by the surrender value of the insurance policy and do not require any additional collateral without having to risk other assets.
These are some of the top benefits of a loan against an insurance policy you can avail yourself of.
What Documents Do You Need To Apply For a Loan Against an Insurance Policy?
You must submit a few documents in order to apply for a loan against your insurance policy online. Also, please make sure your policy is in force and premiums are up-to-date. To apply for a loan against your insurance policy, you’ll need to provide the following:
- Identification proof
- Address proof
- Original insurance policy document
Your insurer may have additional requirements, so it’s best to verify them in advance for a smooth application process.
Who can benefit from a Loan Against Insurance Policy?
A loan against an insurance policy can benefit several individuals, especially those having traditional life insurance policies, such as endowment plans and money-back plans which have accumulated surrender value1. These loans are ideal for policyholders requiring immediate money for medical expenses, emergencies, or any other financial assistance without the hassles of the process of traditional loans. Further, individuals with lower credit scores can benefit from this option as it does not require a credit check, making it easily accessible to a wider range of individuals2.
Conclusion
The Insurance Regulatory and Development Authority of India (IRDAI)4 recently introduced the mandatory feature of policy loans in all life insurance savings policies. The new feature aimed at benefiting the policyholders and allowing them to utilise the accumulated funds in their life insurance policy’s surrender value through a policy loan feature3. Loan against an insurance policy is a practical financial strategy that can help policyholders easily manage unexpected expenses or financial needs while maintaining their insurance coverage benefits.
FAQs
1. Can I take a loan against life insurance?
You can take a loan against life insurance if your policy has acquired a surrender value. Plans like endowment or money-back policies usually qualify to avail a loan against them.
2. What are the processing charges?
Processing charges vary from lender to lender but are typically lower than those for traditional loans. It is advisable to check with your insurer for specific details on the processing charges for loans against the insurance policy. Processing charges are not applicable for traditional loan.
3. How should I apply for a loan against an insurance policy?
To apply for a loan against an insurance policy, contact your insurer or agent. They will guide you through the application process, often requiring basic information about your insurance policy and the desired loan amount.
4. How is interest calculated for a loan against an insurance policy?
Interest for a loan against an insurance policy is generally calculated on the outstanding dues under the loan. The specific rates of interest depend on the terms specified by the lender and as specified in the insurance policy.
5. Can I take a loan by pledging my insurance policy?
Yes, you can pledge your savings-oriented insurance policies, like endowment or money-back plans, and get a loan against their surrender value. Such loans are offered by financial institutions where your insurance policy is considered a collateral security and the loan is offered against its surrender value5.
6. Is there a minimum or maximum loan amount I can take?
The minimum or maximum amount of the loan depends on the surrender value of your insurance policy and the terms and policies of the insurance company.
7. Is it good to take a loan against an insurance policy?
A loan against insurance is a way to access funds without giving up your benefits from your life insurance policy. One of the main benefits of a loan against insurance is that it doesn't impact your CIBIL score or require submitting any fresh collateral.
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