Factors To Consider for a Loan Against Life Insurance

What is a loan against life insurance?

A loan against life insurance is a financial solution that allows you to access funds against your life insurance policy. There are two ways to get the loan.One involves pledging the life insurance policy as collateral and getting a loan against it. The second option consists of taking a loan from the policy itself. Traditional savings-oriented life insurance plans, such as money-back or endowment plans, often offer loans against the policy after the policy attains surrender value, allowing you to access funds without disrupting the policy's continuity.

 

How does a loan against a life insurance policy work?

Savings-oriented life insurance plans usually accumulate a surrender value if you pay the minimum number of premiums. This surrender value or cash value can be used as security for the loan. Thus, if you have an endowment or money-back plan that has accumulated a surrender value, you can obtain a loan against the value.

You can either pledge your life insurance policy to a bank or NBFC and get the loan, or you can apply for the policy loan option available under endowment and money-back plans.Based on the surrender value, you can get a loan that also attracts interest.

 

Factors to be considered for a loan against a life policy:

 

1. Eligibility

 

a. Policy Eligibility

The first step is to confirm whether your insurance policy is eligible for a loan. Check whether your life insurance policy is eligible to serve as a collateral for the loan you want to take1. Life insurance policies with a savings component, such as endowment plans and money-back plans, are eligible for loan1. On the other hand, policies that do not have a savings component, such as term plans, do not qualify for loans¹.

Further, to avail loans under the plan, it is necessary that your policy acquires a surrender value1. A policy acquires surrender value if you have paid the premiums for a minimum tenure as may be required under the individual policy. Review your policy documents to determine eligibility. 

 

b. Policyholder Eligibility

Regarding pledging insurance policies as collateral with banks and non-banking financial companies (NBFCs), there might be specific eligibility criteria for borrowers. These might include minimum age, income, credit score, etc.

 

2. Documentation

Check the list of documents required to avail loan against the insurance policy. The documents primarily include a prescribed application form and a signed deed of assignment for assigning your rights in the policy to the lender to avail the loan along with the following documents:

• Policy document
• Identity proof
• Address proof
• The insurance company may require any other document to approve the loan. 

 

3. Amount of the Loan

Insurers usually allow you to borrow a percentage of your policy’s surrender value—often up to 85% to 90% (may vary basis product). Check the maximum loan that you can borrow against your policy.

 

4. Interest rate

You have to pay an interest on the loan availed against your life insurance policy. Check the interest rate to understand the additional expense incurred on availing of the loan.

 

5. Policy benefits

If your loan is not repaid and a claim is made under the life insurance policy, the outstanding loan amount will be deducted from the policy benefits before paying the claim.

These are some of the important factors to be considered for a loan against a life insurance policy. 

 

Who Should Consider a Loan Against Insurance?

A loan against insurance can be chosen by anyone who wants funds for their financial needs. If you need funds for your personal needs and you are short on savings, you can get a loan against your insurance policy. The loan can give you the funds without affecting your policy’s coverage. 

 

Key takeaways

• A loan against life insurance is a facility wherein you can get funds for your financial needs without terminating the policy and its coverage.
• There are two options for availing a loan against life insurance: you can either pledge the policy with a bank or NBFC and get a loan, or you can apply for a policy loan with the insurance company.
• Traditional savings-oriented plans, like endowment and money back plans, are eligible for loans.
• Check the eligibility, documentation, loan amount, applicable interest rate, and the policy benefits when applying for the loan.

 

Conclusion

Understand how a loan against insurance policies work and the factors for loan against life insurance. borrow a loan when you are in need of funds, but understand the loan amount that you can get and whether your policy allows the loan. After you have availed of the loan, repay it on time to avoid foreclosure, as a foreclosure (for policies with status “under lapse, paid up” only) would stop the coverage, and the policy benefits would cease.

 

Frequently Asked Questions

 

1. How do you apply for a loan against an insurance policy?

You can inform the insurance company of your desire to take out a loan against your insurance policy. Submit the relevant form for applying for the loan and fulfil the necessary formalities to get the loan sanctioned.

 

2. Which types of insurance policies are eligible for loans?

Insurance policies that have a surrender value are eligible for loans. These include endowment and money-back plans.

 

3. What is the maximum loan amount I can avail?

The amount of the loan depends on your surrender value, which is expressed as a percentage of the surrender value your policy has acquired on the date of application. It is one of the important things to be considered for a loan against a life insurance policy.

 

4. Why should I consider taking a loan against my life insurance policy?

Some reasons for which you can apply for a loan against your insurance policy include the following –

• Medical emergencies
• Wedding expenses
• Travel needs
• Higher education
• Business needs, etc.

 

5. Are there any tax implications of taking a loan against my insurance policy?

There is no tax implication of taking a loan against your insurance policy.

 

6. Can I prepay the loan before the life insurance ends?

Yes, you can prepay the existing loan before the policy matures so that you can get the full maturity benefit.

 

7. Does taking a loan against a life insurance policy require a credit score check?

If you apply for a policy loan under your policy from the insurer, a credit check is usually not required. However, if you apply for a loan from a bank or an NBFC, they might check your credit score.