The advantage of loan against insurance is that it is fast, requires minimal documentation, and has fewer chances of rejection. Read on to know more.
Traditionally, a Life Insurance cover is purchased to safeguard the family in the event of the untimely demise of the breadwinner. However, today insurance is not just restricted to risk cover, but can also help you in fetching a loan. Your insurance policy can lend you some money if it is not the usual payout or maturity time. You can always opt for Loans against your insurance policies, typically your traditional policies.
Why Should One Consider A Loan Against Insurance Policy?
The advantage of a loan against insurance is that it is fast, requires minimal documentation and has fewer chances of rejection. Another attractive proposition is the rate of interest, which is lower than unsecured loans like Personal Loans. This also comes handy for people with a low Credit Score.
How To Apply For A Loan
The first and most important step is to go through your policy documents for details and find out what amount you are eligible for. If you are not sure about it, approach your insurer and ask for details.
Once you complete the formalities, your loan will be assessed and your insurer will get in touch with you for any additional documents for transferring the rights to the lender. This usually takes 3 – 4 days. Once the process is completed, you’ll get your loan.
How To Check If Your Policy Is Eligible To Secure A Loan
Many banks and NBFCs provide loan against the surrender value of permanent or whole Life Insurance. However, term plans are an exclusion as they have no maturity value. There are always additional terms and conditions attached to your policies when it comes to giving you loans. For example, your policy acquires the minimum surrender value only if you have paid premiums for at least three years, then you can get a loan only after completing three years of paying the premiums.
How Much Loan You Can Avail
This is something one needs to check with their insurer or bank. You can avail up to 85-90% of the surrender value of traditional plans with guaranteed returns.
If you hold a traditional plan, you are eligible for the surrender value or the guaranteed value, whichever is higher, also called the special surrender value. The guaranteed value is also the minimum eligible loan amount that would be available to you is calculated as 30% of the total premium that you have paid, deducting the first premium paid.
For example, if you wish to take a loan against your insurance policy which is running in its fifth year, you have effectively paid premiums for full four years. Now let’s say your annual premium amounts to Rs. 25,000. So, you have already paid Rs. 1,25,000. So you would get a loan of 30% of 125000-25000= 30% of 100000, which is equivalent to Rs. 30,000. This is the minimum value that you can get.
The maximum value will depend upon the surrender value and the cash value of bonuses, and any additional earnings that you get. Calculating the maximum loan amount is completely the insurer’s call and is usually decided by the actuarial of the insurance company.
For ULIPs, there are only a few companies which provide loan against them. The loan amount is generally decided by the type of fund that you have selected. Those ULIPs, which provide a loan facility, will offer an amount that depends on the current corpus value and the nature of fund in the plan.
In a loan against insurance, the borrower’s income is not a deciding factor for loan eligibility. The CIBIL score of the borrower will be considered.
The maximum loan repayment tenure offered is up to the tenure of the policy. Repayment clauses of each company vary. The loan can either go on for the policy tenure or can have fixed number of years for repayment. The insurer will decide this. Like bank loans, these loans can also be pre-paid without any pre-payment penalty. You should, however, read your policy papers for exact information. However, if you fail to repay your loan, then your policy will lapse.
Things To Keep In Mind
If the loan against insurance policy is not repaid, your family will not get benefits of the insurance. This is because the bank/NBFC has the right to claim the maturity amount.
Since the loan amount depends on your surrender value and the guaranteed value, it will be low in the initial years. However, it will increase subsequently.