Policy loans against insurance policies have become a very sought after means of borrowing in India with huge numbers of policyholders opting for the same. The loans offer easy access to funds without cancellation of policy or lengthy credit appraisal process being followed. Being aware of what loan against insurance policies is and how to proceed to take one makes people wiser money-makers. This article is a step-by-step and factual report on how loans against insurance policies are obtained with emphasis on all the key points for Indian policyholders.
What is loan against insurance policies
A loan against insurance policies is a bank credit facility or an insurance company loan based on the surrender value of a life insurance policy. The policyholders can borrow any portion of the cash value of the policy without ending the policy. Loans against insurance policies are primarily available on permanent life insurance contracts such as endowment policies and whole life policies, which gain cash value over the years.
The loan amount is usually between 70% and 90% of the policy surrender value, as stipulated by the insurer. The borrowed amount attracts interest, and the repayment period depends on the type of policy and lender. Remarkable is that the policy still offers life cover during policy duration even while in loan repayment.
Advantages of loans against insurance policies
Policy loan is a convenient method of satisfying unexpected cash requirements without giving up the benefits of the policy. The key benefits are as under:
Easy access to funds
These involve minimal paperwork and are sent quicker than other loans, thus most appropriate in emergencies.
No credit score effect
As the loan is borrowed against face value of policy at surrender, it will never negatively affect your credit score except in the event of default in paying back the loan.
Low interest expenses
The rates of interest are lower than the non-secured loan such as personal loan, thus making it cost-effective to borrow. This is where the loan against life insurance policy interest rate proves to be more economical for policyholders.
Retention of policy benefit
Your policy remains active during the loan term with life coverage and maturity benefits maintained.
Flexible repayment facility
Insurers offer borrower-friendly options like flexible EMIs and part-prepayment facilities in most cases.
It is an economic and low-risk financing facility for policyholders because of this.
Types of insurance policies that can borrow loans
Not all insurance policies are allowed to lend loans. The most sought after ones are:
- Endowment policies: Provide savings and insurance, with cash surrender value accumulation.
- Whole life policies: Provide lifetime protection with cash value accumulation.
- Money-back policies: Provide return period and cash value accumulation options.
Term insurance policies are not employed to provide loans because they lack cash value.
Step 1: examine policy fitness for a loan
The first step is to ensure that your insurance policy is eligible for a loan. You can achieve this by:
- Checking your policy document for loan arrangements.
- Calling your insurance company’s customer line.
- Finding out if your policy has built up a surrender value (typically after 3 years).
Most companies will not let you borrow unless a policy has been active for several years, typically 3 or more years.
Step 2: work out how much you can borrow from the loan
The amount you can borrow will depend on the cash or surrender value of your policy. Insurers will let you borrow a portion of this amount, for example, 70% to 90%. You will have to:
- Get the latest surrender value statement.
- Work out an estimate of the amount that qualifies using the lender’s loan-to-value (LTV) ratio.
For example, if the policy surrender value is Rs. 500,000 and loan-to-value is 80%, the loan amount will be maximum Rs. 400,000.
Step 3: obtain necessary documents
Documents for insurance policy loan are fewer. Have following ready:
- Original policy document.
- Identity proof (Aadhaar card, PAN card).
- Residence proof (utility bill, passport).
- Passport size photos.
- Loan application form (available at insurer’s office or website).
Some lenders may also ask for additional documents based on in-house standards.
Step 4: visit the insurer or bank to make an application
Insurance policy loans may be borrowed directly from insurers or banks and NBFCs with a mandate to disburse such credit. Don’t miss the below:
- Visit the branch or website of the insurer.
- Call up the customer service or your relationship manager.
- Back your completed loan application with documents.
Banks lend against insurance policy on a secured loan product, which is later packaged in a pool of other financial products.
Step 5: loan approval and disbursal
Post-application:
- Bank or insurer will check your policy position and documents.
- They will determine the surrender value.
- Period of repayment and rate of interest will be mentioned.
- Loan amount is disbursed upon sanctioning, usually 3 to 7 working days.
Interest charges of loans against policy are 9% to 12% per annum, hence lower than for unsecured loans.
Step 6: comprehend interest, repay, and policy effect
Interest on outstanding loan is charged during the loan tenure. It can be repaid at loan maturity or monthly, as mentioned. Defaulting can lead to:
- Decrease in the policy’s surrender value.
- Chances of the policy lapsing when the outstanding loan and interest incurred is greater than the accumulated cash value.
The loans must be re-paid to control so that insurance benefits are never discontinued.
Points prior to lending against insurance policy
Borrowing against your life insurance policy can be a means of instant access to money without sacrificing on interest. But certain things have to be remembered beforehand while acting on it:
Loan tenure
Short repayment tenures are known to reduce overall interest paid for the entire tenure of the loan.
Impact on maturity benefits
Loan amount, as well as interest thereon, will be adjusted against the final maturity or death benefit.
Repayment capacity
Determine your monthly income and cash flows so that you can repay the loan without having an impact on your finances.
Prepayment flexibility
Ensure that the insurer has a part-prepayment acceptance or foreclosure without penalty provision, which can limit your overall interest outgo.
Loan and surrender value eligibility
The highest loan would be based on the surrender value of the policy.
Always go to your insurance agent or a financial planner trained to know what the consequences are in advance while availing the loan.
Loan FAQs for insurance policies
Is term life policy eligible as collateral
No, term life policy cannot be collateralized since it pays death benefits only. No loans are hence given on them.
What if the policy loan remains unpaid
If it is not repaid, the unpaid loan and interest will be deducted by the insurer from the policy’s surrender value or maturity value.
Is there a tax implication
Policy loan interest is not deductible. But loan value is not taxable income.
Conclusion
Policy loans against insurance policies are a simple and inexpensive finance facility available to Indian policyholders in liquidity crisis. Understand what is loan against insurance policies and adopt a structured approach to make the most out of easy availability without losing your insurance cover. With eligibility verification, knowledge of the amount of loan, submission of documents required, and payment in a respectful way, the policyholders are able to get the maximum out of their insurance policies so as to meet financial requirements. The facility serves as a key solution for handling personal finance, emergency situations, and investment prospects without sacrificing precious cover of the insurance.
