Intro: One of the salient benefits of life insurance is that the underlying policy can be used as collateral to tide over a temporary financial crunch. Read on to know more…
Consider this – you are considering a career shift for which you need some funds. While you do have a few investments, exiting at this time would be foolish as you would incur losses on them. So, what do you do? To overcome the temporary cash-crunch, why not take a loan against the life insurance policy that you hold?
Yes, you heard right. The life insurance policy that you have purchased to secure your family’s future in case of all eventualities can also be placed as collateral with your insurer for a loan…
Eligible Policies
Only those policies that have a savings component (i.e. it offers maturity benefits) are eligible for loans. In case of traditional policies, loans are extended against all policy types (generally with the exception of money-back plans), provided the premium has been paid for at least three policy years. In case of unit linked insurance plans, loans are extended in the first 5 policy years.
Procedure
You need to undertake the following steps to avail of a loan against your policy:
1. Confirm with the lender that your policy is acceptable as collateral against the desired loan amount
2. On confirmation, apply for the loan and assign the policy to the insurance provider. By doing so, you are transferring all rights on the policy (such as policy benefits, etc.) to the insurer. The loan will be sanctioned in a few working days
Loan Amount
The loan amount is linked to the surrender value (i.e. the sum that you will receive from the insurer if you exit the policy before maturity) and depends on the type of insurance plan.
In some cases, the insurance companies may stipulate a minimum loan amount.
Interest Rates
The interest rate applicable varies from insurer to insurer and is generally linked to the market rates. In most cases, the interest rate would be relatively lower than those extended in case of personal loans from banks.
Loan Repayment
The term of the loan and repayment options differ from insurer to insurer. In most cases, the loan term can be for the remaining policy term. You have the flexibility to prepay and foreclose the loan any time during the loan term. In most cases, prepayment does not attract any penalty. However, it’s important to read the fine print early on.
Remember
If you miss a loan repayment installment, it may have an adverse impact on your financial health. The loan amount would keep increasing and may exceed the surrender value, in which case the policy would be terminated. On the other hand, if the insured were to die with an outstanding loan against the policy, the beneficiaries of the policy will receive the maturity benefits less the outstanding loan amount along with the interest due.
Consider this – you are considering a career shift for which you need some funds. While you do have a few investments, exiting at this time would be foolish as you would incur losses on them. So, what do you do? To overcome the temporary cash-crunch, why not take a loan against the life insurance policy that you hold?
Yes, you heard right. The life insurance policy that you have purchased to secure your family’s future in case of all eventualities can also be placed as collateral with your insurer for a loan…
Eligible Policies
Only those policies that have a savings component (i.e. it offers maturity benefits) are eligible for loans. In case of traditional policies, loans are extended against all policy types (generally with the exception of money-back plans), provided the premium has been paid for at least three policy years. In case of unit linked insurance plans, loans are extended in the first 5 policy years.
Procedure
You need to undertake the following steps to avail of a loan against your policy:
1. Confirm with the lender that your policy is acceptable as collateral against the desired loan amount
2. On confirmation, apply for the loan and assign the policy to the insurance provider. By doing so, you are transferring all rights on the policy (such as policy benefits, etc.) to the insurer. The loan will be sanctioned in a few working days
Loan Amount
The loan amount is linked to the surrender value (i.e. the sum that you will receive from the insurer if you exit the policy before maturity) and depends on the type of insurance plan.
In some cases, the insurance companies may stipulate a minimum loan amount.
Interest Rates
The interest rate applicable varies from insurer to insurer and is generally linked to the market rates. In most cases, the interest rate would be relatively lower than those extended in case of personal loans from banks.
Loan Repayment
The term of the loan and repayment options differ from insurer to insurer. In most cases, the loan term can be for the remaining policy term. You have the flexibility to prepay and foreclose the loan any time during the loan term. In most cases, prepayment does not attract any penalty. However, it’s important to read the fine print early on.
Remember
If you miss a loan repayment installment, it may have an adverse impact on your financial health. The loan amount would keep increasing and may exceed the surrender value, in which case the policy would be terminated. On the other hand, if the insured were to die with an outstanding loan against the policy, the beneficiaries of the policy will receive the maturity benefits less the outstanding loan amount along with the interest due.
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