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Loan / Overdraft against Insurance Policy

Loan on Insurance Policy

One may take a loan against Insurance policy /policies when a financial emergency comes up.

In such a situation a demand loan or overdraft against insurance policy/ policies is one of the quickest option.

You won’t be eligible for taking a loan against your life insurance plan as soon as you buy it.

You can get a smaller loan amount in the initial policy years.

Quantum of Finance:

Many people thinks that a loan against LIC policy can be taken against the sum assured of the policy.However, this is not true.

your loan gets sanctioned against the policy’s surrender value only.

The loan you can get against your insurance policy varies from one insurance company to another or bank to bank .

But Generally policyholders can get loans up to to 80 to 90% of the surrender value of the policy.

Surrender value is the value of the policy that you get when you terminate the insurance plan.

Surrender value of insurance policy depends upon the premium already paid and the number of times the premium is paid.

It indicates if the premium amount is higher and older the policy then surrender value will be on higher side.

How surrender Value calculated

Surrender value is determined by insurance company only & bank can’t determine surrender value .

Hence bank requires surrender value certificate from insurance company to finance against insurance policy.

Higher the surrender value indicates higher amount of finance.

Interest Rate :

You may get a low interest rate
loan from insurance companies or banks against life insurance policies compare to personal loans.

The life insurance policy is pledged as security for repayment of the loan in the event of a default. Hence, you will get lower interest rates.

Interest on overdraft usually charged higher than demand loan. Demand loan is repayable in EMIs.

Easy & quick process:

When it comes to getting quick loans with minimum paperwork, loan against life insurance scores over other types of loan.

There is no lengthy application process for the loan against a insurance policy.

The life insurance policy is pledged as security for repayment of the loan in the event of a default.

Since the loan is secured there is limited scrutiny and the loan can be disbursed quickly.

Insurance Policies eligible for Loan:

A loan can be taken only against traditional life insurance policies and not against a term plan.

Traditional plans include endowment policies, money-back plans, whole life etc., where there is a guaranteed return.

Some insurance companies gives loans against unit-linked insurance plans also.

Who will pay upcoming premium:

The policyholder needs to pay interest on the loan taken against the policy as well as premiums on the policy.

The insurance company/ bank also has the right to recover the principal and interest due from the surrender value of the policy.

Assignment of policy :

A deed is signed in which the benefits of the insurance policy against which the loan is availed is assigned to the lender or the insurance company. This called assignment of policy.

Demise of policy holder:

When you take a loan against life insurance policy, the policy gets assigned to the lender who may reserve the right to deduct the loan and interest outstanding in case of situation of death of policyholder.

Advise:

The purpose of buying life insurance is to insure our family members in case of one’s unfortunate demise.

However, in case of any emergency if you want to take a loan against life insurance, then it should be used only for short-term periods or when the borrower is unable to borrow any other type of loan.

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