During the course of your life, there will be times when you are in need of a significant sum of money. There could be an upcoming wedding or a house renovation that cannot be put off any longer; how, then, would you go about arranging the necessary funds for such events? Most people might immediately apply for a personal loan or a gold loan or even pledge their property as a collateral for funds, if that is an option. While these methods may serve your financial needs just fine, borrowers must be aware of another very viable option to raise funds – taking a loan against an existing life insurance policy!
The primary objective of a life insurance plan is to provide the policyholder with a risk cover that will provide a death benefit to the nominee, should anything happen to the life assured. However, life insurance policies also come with a range of other benefits, that make them a worthy investment option. If you find yourself in the midst of a financially troubled time, you can make the most of your policy by taking a loan against it. Policyholders will be glad to know that most financial institutions will readily provide a loan when offered a life insurance policy as collateral.
Seven things you should know Before Applying for a Loan Against your Life Insurance Policy:
1. Is your policy eligible for a loan facility?
Not all life insurance policies provide a loan facility. Since term-linked policies do not offer the policyholder any cash value at maturity, policyholders will not be eligible to take a loan against these policies. Most ULIP plans, also, don’t have a loan option. However, money-back policies, endowment policies, whole of life policies, etc. usually provide this added benefit to policyholders.
2. Surrender Value of your Policy
Another thing to remember is that even if your policy is pre-approved for a loan, you can only avail this facility if your policy has gained a Surrender Value. For your policy to acquire a Surrender Value, you will have to regularly pay your due premiums for at least three years from the policy’s date of inception.
3. How much can you borrow as the loan amount?
The loan amount which you will be eligible for depends on the Surrender Value that your life insurance policy has acquired. However, banks and insurance providers will not offer you a loan on the entire Surrender Value, and will instead offer you what is a percentage of the policy’s Surrender Value.
The loan amount that you are entitled to borrow will vary between insurance providers and banks. However, you can usually borrow up to a maximum of 90% of the Surrender Value of your policy.
4. Applicable rate of interest on your loan
Policyholders will have to pay an interest to the lender on a regular basis. The interest rate is usually linked to the base rate of the policy. Interest rates for loans taken against insurance policies are comparatively lower than interest rates for personal loans. In some cases, banks and insurance providers will allow borrowers to only pay the interest during the loan term and settle the principal amount at maturity of the policy.
The interest rates for your loan will also vary as per the prevailing interest rates for your policy. Usually, the interest rates are around 10% p.a., for loans taken against insurance policies.
5. How do you repay a loan taken against your life insurance policy?
When a loan is taken against an insurance policy, the loan term is the same as the policy term. The policyholder will need to pay all due payments before the end of the policy term. Repayment terms may vary between different lenders. Most lenders will allow customers to prepay the loan, without any extra charges. You will also have to keep your policy running by paying all due premiums during the policy term to keep the policy from lapsing.
6. How to apply for a loan against your insurance policy
The application process to take a loan against your life insurance policy will vary slightly from place to place. To apply for a loan, the policyholder will have to contact a representative from the insurance company and enquire about the process, the Surrender Value of the policy and any other terms and conditions related to this.
7. Documents to be submitted while applying for a loan
The policyholder will have to submit:
o A loan application form
o The original insurance policy
o A signed agreement, which assigns the policy to the lender
Drawbacks of Taking a Loan Against an Insurance Policy:
While taking a loan against a life insurance policy has many benefits, including a lower interest rate, a shorter wait-time for approval, etc., you must choose this option only as the last resort. A life insurance policy provides you with a security cover and offers your dependants financial security, in case something happens to you during the policy term. The death benefit paid to your nominee can help them meet their immediate financial needs, clear off any debts and plan for their future.
However, if you take a loan against your insurance policy and something happens to you before you clear off the loan, the lender will claim the remaining unpaid loan amount from the death benefit that is to be paid to your nominee. Your nominee will then receive only a portion of the death benefit that they were supposed to get.