Loan Against Life Insurance Policy: Getting A Loan To Cover Your Financial Gap
In times of emergency, quite a few individuals usually think of liquidating their investments and life insurance policies. But doing this deranges the wealth creation process and endangers accomplishing the envisioned financial goals. So, it is clearly not the best choice in the long run.
Availability of a loan, instead, is a better alternative provided you borrow within your means and diligently repay the loan to avoid a debt-overhang situation. If you hold a life insurance policy,
Leveraging it to get a loan almost instantly may be a sensible decision. Meaning, you can avail of a Loan Against Life Insurance Policy.
What is a Loan Against Life Insurance Policy and how does it work?
Under Loan Against Life Insurance Policy, you pledge your life insurance policy with the bank or a Non-Banking Financial Company (NBFC), which then offers you a line of credit or loan. This process is called leveraging the insurance policy.
The lender grants a loan depending on the cash value or surrender value of your life insurance policy that you offer as collateral, and the loan generally is given in the form of an overdraft. Since you are pledging the life insurance policy, a high credit score is not necessary, making it convenient for those with a low credit score.
Depending on the surrender value of the life insurance policy, the lender sanctions the credit limit and the loan is granted. It is not necessary that you utilize the entire sanctioned limit, only a portion of it can be utilized and the interest is charged only on the amount you use. Moreover, there is no restriction on the end-use of the loan amount; it can be used for whatever the purpose may be.
So, here are some fine points…
- While leveraging an insurance policy, you do not actually utilize the cash value in a policy. Instead, you avail of a loan that is backed up by the cash value.
- Since you provide 100% security to the lender, your credit score is not considered to approve the loan. Neither does the repayment of a life insurance policy loan affect your credit score.
- As a borrower, you are free to use the loan amount for whatever purpose.
- In case you default in paying premiums or repaying the loan, the insurance policy will lapse. Moreover, the lender holds a right to recover the unpaid principal and interest from the surrender value of the policy.
Can you get a loan on any life insurance policy?
No, as per the IRDA’s guidelines, Loan Against Life Insurance Policy facility is not available under the Term Insurance Policy and Unit-Linked Insurance Plans. This is because these policies do not come with a definite cash value.
Only traditional insurance policies such as endowment and money-back policies are available for Loan Against Life Insurance facility since they have a definite cash value or surrender value component during the term of the policy. You see, for endowment and money-back policies, a part of the premium you pay goes towards the cash value and the rest for indemnifying risk to life. But keep in mind, the facility to borrow against a cash value or surrender value is offered once the cash value reaches a specific limit, which may take around 3 to 5 years since the time you purchased such a policy.
Who can avail of a Loan Against Life Insurance Policy?
There are no complicated eligibility requirements since you are leveraging your insurance policy and the life insurance policy is pledged. That said, you should be…
- A Resident Indian
- Completed 21 years of age
- Having a regular income source
What are the things to consider when availing of a loan against your life insurance policy?
You cannot avail of a Loan Against Life Insurance Policy immediately after you purchase the policy. Generally, there is a waiting period of 3–5 years for such loans. Since the loan is given against the cash value in the policy, you, the policyholder, have to wait until the sufficient cash value accumulates.
Your loan amount depends on the surrender value, the number of premiums paid, the number of years completed or remaining, etc. Generally, you can get a loan of up to 80% — 90% of the current surrender value of your life insurance policy. For e.g., if you have a life insurance policy of Rs 50 lakh and the current surrender value is Rs 25 Lakh, the loan amount you are eligible for will be around Rs 20 to 22 lakh.
Rate of interest:
The rate of interest in the case of a Loan Against Life Insurance Policy is lower than on a personal loan (an unsecured loan). Generally, the rate of interest on the Loan Against Insurance Policy ranges between 10% — 12%. But if you stretch the repayment of your loan for a longer period, you might end up paying a higher compounded interest. That being said, your insurance policy’s cash value also continues to increase over the course of time given that such policies come with guaranteed returns.
Time take for disbursement:
The loan against insurance policy involves minimal to no paperwork, and the application process is not lengthy unlike other types of loans. Some lenders even allow you to apply for a Loan Against Insurance Policy online by sharing your personal details and uploading the life insurance policy you wish to pledge for a loan, checking the terms and conditions, and within a matter of few minutes, you are apprised about the loan status. Since it is a secured loan, there is less scrutiny, making the loan amount available almost instantly.
How to apply for a Loan Against Life Insurance Policy?
The application process to avail of a Loan Against Insurance Policy differs with each lender.
DhanLap powered by Ark Neo Finance helps you get a Loan Against Insurance Policy within 15 minutes online from the comfort of your home, office, or wherever you are. The application process is quick and easy. Here are the simple steps to follow:
- Visit the official website www.dhanlap.com
- Sign up by verifying your mobile number and email address.
- Share your personal details such as, name, age, address, contact details, details of identity and address proofs, etc.
- Share the details of the insurance policy you wish to leverage.
- Mark lien on the insurance policy digitally.
- Read and check on all the Terms and Conditions.
- You will receive a ready-to-use loan amount within a few minutes.
If you hold an endowment plan or a money-back policy and are in urgent need of money, it makes sense to avail of a Loan Against the Life Insurance Policy as opposed to surrendering it or taking a personal loan that levies a higher rate of interest. However, make sure you understand the loan features well, the eligibility criteria and read all the terms and conditions carefully before applying for a Loan Against Insurance Policy.
This article has been authored by PersonalFN — a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.