Loan Against Your Life Insurance Policy
Life insurance is a way to ensure that the future of your loved ones is safeguarded. When customers buy one of these policies, most of them do so with the wellbeing of their family members in mind. A person’s departure can be cause for grief and loss for their near and dear ones. Additionally, they may also face financial distress after a person is gone, especially if they have lost an earning member of the family.
But the use of a life cover is not limited to safeguarding the future. There are a lot more features that life insurance can offer, depending on the type of policy chosen. One of the lesser-known features of life insurance policies is that they can be used to get a loan against them.
Loan Against Life Insurance
The need for a loan can arise at any time in life. You may need to fund an unforeseen, personal situation, a wedding, an education expense you weren’t prepared for, or a house renovation that cannot be postponed any further. These are only a few of the situations you may need a loan for.
Generally, people either turn to their friends or family for a small loan amount, or banks or financial institutions for a larger sum. However, you may not have to resort to these means if you have a life insurance plan. You can borrow a loan against your life insurance policy.
It is important to remember that a loan against life insurance is not available in all types of life insurance. Hence, when you buy a life insurance policy, you can check whether you may be able to avail of a loan against the same in the future.
Things You Should Be Aware Of About Loan Against Life Insurance
Knowing the details of how and when you can avail of a loan against it if the need arises can help you deal with life situations more easily. Here are some of the significant details you should take note of regarding loans against life insurance.
- Policy Eligibility
The first and foremost thing to check for is your plan’s eligibility for a loan. When you are buying a life insurance policy, it is advisable to check whether a loan can be availed of against this policy. For example, not all ULIPs (Unit-linked Insurance Plans) may offer loans against it. Similarly, loan facilities are commonly not available with level term insurance plans.
- Policy Surrender Value
After regular payment of premiums for a certain period of time, your life insurance policy gains a surrender value. You are only eligible for a loan if your policy has earned the surrender value. You can use a life insurance calculator, if available, or consult your insurance provider representative to know the surrender value of your policy.
- Loan Amount
The loan amount you may be able to avail against a policy is usually a percentage of the surrender value. Commonly, you may be able to borrow 80% to 90% of your surrender value as a loan amount. A comprehensive life insurance calculator may help you calculate the surrender value and the maximum loan amount you may expect from your policy.
- Rate of Interest
The interest rate on your loan against a policy is usually based on the policy’s base rate. This usually affords you a relatively lower interest rate as compared to the rate of interest on loans taken from banks or financial institutions. Thus, if the need ever arises, you may be able to avail of a more affordable loan against your life insurance plan.
- Applying for a Loan Against Policy
The application processes for loans against life plans may differ across insurance providers. The usual application process requirements include:
- Insurance policy
- Loan application form
- Agreement to assign the policy to the lender.
If you are looking to apply for a loan against insurance, it is advisable to consult your policy provider.
Should You Get Loan Against Life Insurance?
While loan against life insurance plans tends to be more easily accessible and relatively more affordable, you may find that there are some drawbacks to them.
If you fail to repay the loan, you may lose access to your life cover. Moreover, if the person insured passes away before the loan is repaid in full, the insurer may recover the remainder from the death benefit that is to be paid to the nominee. Consequently, your nominee may not be able to benefit much from the policy.
Hence, availing of a loan against your life insurance policy should be a well-thought decision. Avoid getting a loan, against life insurance or otherwise, unless necessary.
A loan against life insurance is a convenient way to get access to funds when you need them. However, given the drawbacks, it is essential to give careful thought to getting such a loan and dealing with the repayment.