Everyone faces a cash crunch situation at some point. In such a situation, instead of applying for a loan at banks, you can use your life insurance policy to your advantage and avail long against it. Read on to know more:
The primary function of a life insurance policy is to provide the policyholders protection against uncertainties. But, over the years, life insurance has evolved significantly and it is one of the versatile financial products that allows the policyholders to avail a loan against their policy. So, not only does it provide a security cover, but also helps people get immediate funds during an emergency.
Today, the concept of loan against insurance policy is gaining immense popularity, as the interest for this type of loan is much lower than unsecured loan like a personal loan. Another significant benefit of applying for a loan against a life insurance policy is that the value of the policy does not change even as the market condition changes, as is the case with loan against gold or loan against shares.
But, before you apply for a loan against your life insurance policy, there are several important factors you must consider, which are discussed below:
Before you initiate the loan application process, it is advisable that you speak to your insurer if the type of policy you hold is eligible for getting a loan as the loan facility is not available for all life insurance policies. Typically, the insurers in India offer loan against a whole life insurance; you cannot get a loan if you have a term policy. This is because unlike other types of policies, term insurance does not have any cash value.
Also, to be eligible for loan, you must be paying the premium for at least three years at the time of applying for a loan. Additionally, the insurers consider the income, and creditworthiness before approving the loan.
You must check with the insurance company about the maximum amount you can apply. Generally, most insurers approve loan based on a certain percentage of the surrender value of the policy; it can vary from 80-90%. Once your loan application is sanctioned, the policy is assigned to the lender, which means the lender gets full right over the policy rights. Furthermore, since the amount you borrow is not an income, it is exempted from tax.
The interest rate for loan against life insurance policy depends on the number of you premium you have already paid and the total value of the policy. The more the premium you have, and higher the policy value, you can get a loan at lower interest rate.
Generally, the lenders link the interest rate to the base rate. Since some lenders consider this type of loan as an overdraft facility, the interest rate of a loan can vary from 9-14% based on the type of insurance policy you hold, the tenure of the loan, and the amount you wish to borrow.
To avail loan against your insurance policy, you must fill a prescribed loan application form, and submit a copy of the policy documents. Also, you may have to sign a deed of agreement which states that the benefits of the policy are transferred to the lender until the loan is fully repaid. So, basically, the policy documents act as a collateral for the loan.
Once you avail the loan against your life insurance policy, you must continue to pay the premium, and if you default on the premium payment, you may risk the termination of the policy.
Thus, there are many factors to consider while applying for a loan against life insurance policy. Make sure that you do your research well about it so that you can make an informed borrowing decision.