Loan Against Your Life Insurance Policy - All You Need To Know   Jul 25, 2017


Harjeet is all set to purchase a two-bedroom house in Mumbai. And he faced a situation most homebuyers generally face—falling short of funds. As you might be aware, there are several hidden costs involved in availing a home-loan along with high property rates.

He additionally needs around Rs 1,50,000. After performing the requisite amount of research, he realized that personal loan would not be a viable option for him. He approached his friend, Prathamesh, a Certified Financial Guardian.

Prathamesh suggested that Harjeet could opt for a loan against his life insurance policy.

Are you looking for a loan too?

A loan with very little documentation and low interest cost?

You can apply for a loan against your insurance policy —which is a loan against security.

So, how does loan against life insurance policy work?

You can apply for loan against your insurance policy either through the insurance company or as collateral with the bank. Through this way, your policy will be pledged as collateral and the desired loan amount will be disbursed to you.

Now, insurance policies are usually bought with an aim to safeguard self and family from the future uncertainty. But in case of an emergency, a loan against your insurance policy will enable you to leverage your existing insurance policy in times of need.

As per IRDA’s guidelines, a loan facility is not available under Unit Linked Insurance plans (ULIPs) and a Term Insurance Policy. Traditional insurance policies such as endowment, money-back policies, etc. are eligible for loan. However, you need to check the terms & conditions of your insurance policy and enquire if your insurance policy qualifies for the loan facility.

Eligibility criteria for loan against Insurance Policy

Loan Value: The present value of your policy, if you wish to voluntarily terminate today, is termed as ‘Surrender Value’. Hence, the surrender value continues to increase with the term of your policy.

Your loan amount depends on the surrender value, number of premiums paid, number of years completed or remaining, etc. Generally, 80-90% of the surrender value can be availed as loan against insurance policy. For example, if you have an insurance cover of Rs 20 lakh and its surrender value is Rs 5 lakh, you are probably eligible for a loan amount Rs 4.0-4.5 lakh.

Another common method is the 50% of the total amount of premiums paid up till now.

However, the loan amount calculation varies from company to company.

Premiums: Your life insurance policy should have completed at least 3 years. In other words, it implies that you have paid premiums for at least 3 years prior to the loan application.

During the loan tenure, the policyholder has to continue paying the premiums. If at any given point of time there is a failure to pay the premium, the insurer may terminate the policy.

Documents Required: The documentation process is simple. But the documents required vary from company to company. Nevertheless, the following documents are commonly required:
 

  1. Original Policy Document
  2. Deed of assignment (under which the benefits of life insurance policy, against which the loan is taken, will be assigned to the insurance company or the bank)
  3. Cancelled cheque (to deposit your loan amount into your account)


Loan Processing Fee: This fee is very low in the range of 0%-3% of the loan amount. Some insurers might also charge a flat fee. Nevertheless, the fee is comparatively lower than any other personal credit options available in the market.

Interest Charge: Insurance companies charge an interest rate in the range of 10%-12% and are revised annually. Usually interest is paid every 3 months, 6 months, or annually, some insurers have a minimum 6 months duration. Under this regulation you need to pay the interest for minimum 6 months before you decide to foreclose your loan within 6 months.

Still this is more economical as compared to personal loans which charge interest around 13%-15% p.a.

Loan Repayment: Repayment options also vary. The loan amount is, ideally, meant to be repaid during the tenure of the insurance policy. The policyholder either has the option of paying back the principal or keep paying interest regularly. At the time of settlement, the loan amount will be deducted from the remaining claim.

In case you consider the option of availing a personal loan, the loan repayment tenure ranges between 1 to 5 years.

Loan Processing Procedure: Your loan can be sanctioned between 2-7days of the application. There is less scrutiny and a faster process to avail the loan.

Default on Repayment of Loan: If you default the repayment or payment of premiums, your insurance policy will lapse. The insurance company has the rights to recover your loan amount/ interest from the surrender value.

Here are two key benefits of loan against insurance…

Low on cost: As the interest charge and other processing fees are much lower as compared to a personal loan, loan against your insurance policy becomes a viable option.

Less scrutiny and easy documentation: The documentation process is simple and less cumbersome. Plus, the chance of your application being rejected is low.

To Sum-up…

Loan against insurance policy should be availed only in case of an emergency. And once you take a loan, it is imperative to diligently repay it as soon as possible, so as to reduce your interest outgo.

And don’t miss paying your insurance premiums on time, as it can prove imprudent. In case of an untoward incidence such as death, you will be jeopardising the financial interest of you loved ones. Life is uncertain and hence, it is imperative take each step prudently.

Below are 10 points to bear in mind before you opt for a loan:

 

 

  1. Know your finances precisely
  2. Ascertain why you are borrowing
  3. Recognise what will be Debt-Income Ratio (D/I) (your total monthly debt commitments should not exceed 40% of your gross income)
  4. Have a plan of how to re-pay your loan
  5. Maintain a contingency fund
  6. Ensure you hold adequate insurance
  7. Save enough for the golden years and
  8. Keep your family in the loop


  9.  

Though loan facilities are available, you ought to take enough care before availing them.

 

 

 



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