This article talks about the features, benefits, and procedures to apply for Loan Against Insurance Policy.
Insurances are something that the majority of us opt for. Loans are another thing that most of us requires at least once in our lifetime. When you face cash crunches, taking unsecured personal loans is not the only option that you have. You can also avail of loans against your insurance policy. Thus, in case of any financial emergencies, you can get funds by pledging your insurance policy as collateral. This form of loan is gaining popularity as it allows you to keep your insurance intact for emergencies and raise the funds for immediate use. Let us understand loans against insurance policy in detail.
Loan Against Insurance Policy: Overview
When a loan is availed keeping an insurance policy as collateral, is known as a loan against the insurance policy. Under this loan type, life insurance policies such as unit-linked insurance policies, endowment policies, and money-back policies, for which premiums for at least 3 years are paid for are eligible. An insurance policy with no surrender value like term insurance is not eligible for the loan. Usually, the loan amount depends on the type of insurance policy and the remaining tenure of the policy. Similarly, the interest rate on such loans depends upon the amount and the instalments of the premium paid. The only drawback of this loan type is that in the event of the death of the policyholder during the term of the policy, the nominee will not get the full benefits of the policy. The lender shall deduct his share of the outstanding loan and interest before paying to the other beneficiaries.
Features of Loan Against Insurance Policy
- Eligible Policies: Eligible policies for availing loans are life insurance policies such as unit-linked insurance policies (ULIPs), endowment policies, and money-back policies.
- Loan Amount: The loan amount depends mainly on the type of the life insurance policy and its remaining tenure. Usually, in the case of ULIPs, the loan offered is up to 70-75% of the paid-up value, whereas, in the case of other traditional insurance policies, the loan offered is up to 85-90% of the sanctioned value.
- Interest Rate: The interest rate on a loan against an insurance policy depends mainly on the amount and instalments of the premium paid. As a general rule, the more the premium amount and instalments, the lesser will be the interest rate.
- Tax Benefits: No specific tax benefit is available for loans against the insurance policy. But it may be allowed as a deduction from the income head ‘income from house property if the loan is used by the borrower to re-construct, repair, renovate or renew their property.
- Repayment: The repayment of the loan is subject to a repayment schedule. Though the borrowers are at liberty to pre-pay or foreclose their loan without any additional charges. The repayment clauses may vary from insurer to insurer.
- Failure to Repay the Loan: In the event of failure to repay the loan, the outstanding balance will increase due to the compounding effect and the unpaid amount will keep accumulating to the principal amount. The insurance policy gets terminated when the outstanding premium and the interest amount become equal to the surrender value. In such instances, the policyholder loses their insurance coverage.
Benefits of Loan Against Insurance Policy
Opting for a loan against an insurance policy can benefit you in multiple ways. Some of these benefits are:
- Low-Interest Rates: A loan against an insurance policy is a good alternative to personal loans. The interest rates on such loans are also significantly lower as compared to other types of loans.
- High Loan Value: In this loan type, the loan amount depends on the surrender value of your insurance policy. Thus, policyholders can avail of loans up to 85-90% of their policy’s surrender value. This loan amount can be used for several purposes like purchasing a new house, mergers, and other personal or professional goals.
- Easy repayments: Though, the repayment clause under loan against insurance policy varies from insurer to insurer, they usually offer the benefit of relaxed prepayment and foreclosure terms without any additional charges.
- Minimal Documentation: The documentation required under this loan against an insurance policy is minimal and there are fewer chances of rejection. To apply for such a loan, one only requires submission of basic documents like ID proof, address proof, document proof of insurance policy, and a passport size photograph.
- Flexi-Loan Facility: A loan against an insurance policy is best suited for individuals requiring finances unexpectedly or on a periodic basis. It provides borrowers with a Flexi-loan facility, where they can make multiple withdrawals from the total sanctioned amount and pay the interest only on the amount utilized. You may also choose to pay interest-only EMIs and repay the principal at the end of the tenor of the loan.
Procedure to Apply for Loan Against Insurance Policy
The application procedure for a loan against an insurance policy varies from lender to lender. But the basic steps involved are as follows:
- As a first step, the policyholder applies for the loan with the lender by assigning the policy to them (insurance company/bank) and determining the eligible loan amount.
- The policyholder then needs to mention the details of the policy and the loan amount in the format prescribed by the lender. Banks may charge processing fees and other charges in addition to the interest rate.
- The loan is then sanctioned within 2-3 working days from the date of application. This may vary from one lender to another.
- After the loan is sanctioned, all the rights on the policy are transferred to the lender, post the loan disbursement.
Finally, when the loan is fully repaid, the lender reassigns the insurance policy to the borrower.
Borrowers need to submit the following documents to avail of the loan against the insurance policy:
- Basic personal documents such as ID proof and address proof.
- Document proof of insurance policy.
- Deed of Assignment
- Cancelled Cheque
- Payment Receipt of the premium on the insurance
A loan against an insurance policy is a good alternative to other forms of secured and unsecured loans. But as a precaution, before you plan to opt for this loan, fully understand the terms and conditions of the loan. You must be aware of the short-term and long-term risks attached to this form of a loan. You may also seek the advice of an insurance advisor before availing of any loan against your insurance policy.