Tips & Guide to Taking Loan Against Life Insurance Policy

What would you do when you are urgently in need of funds? Most people hesitate from taking out a personal loan because of its high interest rates. But if you have a life insurance policy, then you could well be at a great advantage because it’s possible to take out a loan with life insurance as collateral.

The positives are many – lower interest rate, hassle free experience, easy repayment options and low credit scores. But one also must know the important details that are relevant to availing loans. 

If you are planning to buy life insurance to take out a loan against it, then you need to consider the below points. There are different aspects to life insurance related loans and you need to be aware of all of them so you can make an informed choice. 

Here are five important aspects of loans against life insurance policies that you must know:

1. Eligibility of policy -

   Not all life insurance policies are eligible for loans. Typically, unit linked insurance plans and term insurance plans do not come under this bracket. If you have an endowment or money back life insurance plan, you can avail for a loan. Your life insurance policy is used as collateral for loan in such a case.

2. Loan Amount -

   The loan amount that you can obtain from a life insurance plan would typically be around 85 to 90% of the surrender value. This means that if you buy a life insurance policy of Rs. 10 lakhs and the surrender value comes to Rs. 5 lakhs at the point when you want to take out a loan, the loan amount you would be eligible for would be Rs. 4.5 to Rs. 5 lakhs.

3. Waiting period -

   A life insurance policy is not a get-quick-loan scheme. On the contrary, you must wait for three years before you can avail for a loan using your life insurance policy as collateral. Moreover, you also need to make sure that you have paid all the premiums on time. The other important thing to remember is that you must continue paying your premiums throughout the tenure of your policy. If not, insurers have the right to cancel your life insurance policy.

4. Interest -

   A loan against life insurance offers relatively lower interest rates. Interest is charged based on the number of premiums and amount of premium paid.

5. Repayment -

   Any loan acquired against life insurance should be paid during the tenure of the policy. Borrowers can pay either just the interest or principal + interest. Every policy or financial institution has its own repayment rules which could vary. When the tenure ends and the loan has not been completely repaid, the balance amount is adjusted against the claim amount.

For most people, a loan against life insurance might turn out to be a life saver, but one should not depend upon it entirely. After all, the life insurance policy was purchased for a reason and we can have our long term plans for our loved ones fall by the wayside to fulfil short term financial needs. Moreover, one also needs to assess all the risks and decide based upon that.