How To Utilize Your Insurance Policy To Secure A Loan?
Published On Nov 30, 2021 11:00 AM By InsuranceDekho
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A guaranteed return insurance plan is a safe investment option that offers the dual benefit of insurance and investment. To overcome a financial crunch, you can use your life insurance cover or a guaranteed return plan instead of opting for an unsecured loan.
Eligible Policies to Apply for a Loan Against Life Insurance
A loan against insurance policies is only applicable towards a traditional guaranteed return insurance plan. These might include money-back or endowment policies, as these are viewed as a safe investment option by insurance companies to give a loan against. A guaranteed return investment plan combines insurance with investment. This means that under its insurance component, if the policyholder were to pass away, the nominees receive a death benefit. Additionally, under the investment component of a guaranteed plan, if the policyholder survived the policy tenure, they are paid a maturity benefit. For a policy to be eligible for getting a loan, it must have a surrender value associated with it.
You cannot get a loan against your term insurance. This is because term plans don’t come with a maturity benefit, which is why this life insurance does not make the cut for the list of approved investments for securing a loan. For non-term plans, if your premiums have been paid promptly for three or more years, then a loan can be applied against it. Undertaking a loan against insurance is like borrowing from yourself, which is why the process for loan application is not stringent. An important clause to bear in mind is that after taking the loan, the policyholder has to continue paying premiums for their guaranteed return plan. The failure to do so might result in a termination of the policy.
Benefits of Loans Against Guaranteed Plans
Loans against a guaranteed return insurance plan are becoming a favourable option because of the benefits it offers. Here’s why you should opt for a loan against a guaranteed plan instead of choosing other options:
- When sanctioning a loan against life insurance, banks don’t check the applicant’s credit score. For loan seekers with a low credit score, this becomes a more favourable option.
- Getting personal loans against life insurance garners a significantly lower interest rate as opposed to a regular loan. The interest for a regular personal loan is usually between 12% to 24%, whereas for insurance-based loans, the interest rates are between 10.5% to 12.5%.
- Loans against a guaranteed return plan don’t require too many documents owing to which the loan is easily sanctioned.
- Finally, the policy value remains unchanged as opposed to loans against gold or shares.
How to Apply for Loan Against Insurance?
The loan application process is fairly straightforward when applying for a loan against insurance. Following are the steps the applicant needs to follow:
Step 1: To apply for a loan against your guaranteed plan, check with the insurance provider for the amount that you are eligible to receive.
Step 2: After the loan amount is determined, apply for the loan and assign the policy to the loan provider.
Step 3: Then, in the format prescribed by the lender, mention the policy details and the loan amount
Step 4: Pay the charges levied by the bank, which might include the processing fee and other charges in addition to the rate of interest.
Once the aforementioned steps are complete, the loan is sanctioned to the borrower within two to three days; however, the time may vary based on the lender. Upon loan sanction, the policy rights are automatically transferred to the lender as collateral. This policy is reassigned to the borrower upon repayment of the loan.
While it is easy to take a loan against your insurance policy, it is important to ensure its timely repayment. This is because investments are made for future financial security, and failure to repay the loan can leave you and your loved ones in a compromising position in the future.
Also read: How To Choose Your Life Insurance Agent?
What Are The Benefits of Having A Life Insurance Policy?
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.