How To Get Loan Against Life Insurance Policy?
Updated On Mar 21, 2022
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The main function of a life insurance policy was originally to provide protective cover. However, life insurance is a far more versatile investment option nowadays, also giving the policyholders a benefit of availing a loan against life insurance policy. So, not only does it provide security but it also helps when one is going through a cash crunch. Loan against life insurance policy is becoming a popular choice among the customers, since a lower rate of interest is charged in comparison to a personal loan. One additional benefit of loans against life insurance is that the policy value does not change in the market as in the case of loans against gold or shares.
There are however a number of factors one needs to bear in mind before opting for a loan against a Life insurance policy.
These factors have been listed below.
Important Factors To Know Before Buying A Life Insurance Policy
The list of factors that are important to know are:
1. Eligibility of The Policy
You need to confirm whether your policy qualifies for a loan or not, as all the insurance policies do not provide this benefit. You can take a loan against the surrender value of permanent or whole life insurance but not against term insurance. If you have paid premiums for 3 years and on time then you may avail for a loan as far as non term plans go.
2. Loan Amount
You need to check the amount you are eligible for, with the insurance company or the bank. The loan amount is the percentage of the surrender value. Loans can be up to 85 to 90% against traditional plans with guaranteed returns. Not all unit linked policies provide loan facilities, but if they are provided, then the loan amount depends on the current value of the corpus and the type of fund.
3. Interest Charged
The interest rate charged on loans against life insurance policies is based on the premium already paid and the number of premiums that have been paid. The more the premium amount and the number of premiums paid, the lower the rate of interest charged.
4. Documentation Needed
The policyholder has to contact the insurance company to enquire about the process and the documents needed. A pre-prescribed form has to be filled, and the original insurance policy has to be submitted. The policyholder also has to sign a deed of assignment which states that the benefits of the policy are being assigned to the lender during the loan tenure. The policy will act as collateral till the loan is repaid.
Upon taking a loan against the life insurance policy, the policyholder needs to continue paying the premiums. In such an event where the policyholder desists from doing so, some insurers may terminate the policy.
6. Repayment of Loan
The loan should be repaid during the term of the policy. The policyholder has the option either to payback the principal along with the interest or only the interest amount. If one pays only interest, the principal amount will be deducted from the claim amount at the time of settlement.
It is prudent to pay back the loan in a timely manner as the interest keeps getting added to the balance whether the loan is being repaid or not. This increases the risk amount exceeding the policy's cash value, which can cause the policy to lapse. In such a case, taxes might have to be paid on the cash value. In case of non-payment of the loan, the amount owed will be taken from the accumulated surrender value of the policy and the policy will be terminated.
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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.