When Should You Opt For Loan Against Life Insurance?

Most people usually get confused regarding what is meant by a loan against life insurance. When people are facing some short-term financial crisis, they usually consider Personal loans in order to get through the emergency. It happen the majority of the time that you are required to make payment of a high interest rate on personal loans and also, the repayment period is very small. During such circumstances, you need to focus on some other prospects to balance the crisis. You can take a look at the investments you did. It is found that one of the best substitutes is to go for a loan against Life Insurance based policy which you have already availed to protect yourself as well as your family.

The option seems a simple one because you obtain a loan against a particular policy on which you are already paying a premium on a regular basis. In addition to that, in this, interest rates levied on loan, the loan processing cost, documentation needed for a loan against Life Insurance are very less. The process is seamless as compared to the one you have to go through while availing a personal loan. It is best to first know the reasons why you need it and then go for it.

Go for Loan against Life Insurance after checking the Loan Amount

Initially, you should properly check the loan amount for which you are liable for, in accordance with the particular insurance company or the particular bank. Basically, the loan amount is known to be a proportion of its surrender value. It must be kept in mind that loans can range up to 85-90% against conventional plans along with guaranteed returns. Also, you should note that every ULIP Plan does not offer loan facilities; however, if they offer then it is assured that the loan amount relies on the existing worth of the amount as well as the kind of fund.

Now after deciding the loan amount, the next step is that the policy is allocated to the lender. It suggests that every right of the policy is allocated to the lender; also, the particular loan is authorized to the borrower afterward.

Know the Surrender Value

If you own a Life Insurance in which the sum assured is actually Rs 10 lac by the completion of the tenure, it is possible that you are not liable for availing a loan of worth Rs 10 lakh. The fact is the loan sum relies on the policy’s surrender value. It is found that surrender value is essentially the policy’s prevailing value whenever you cease the plan willingly. It is found that in the majority of instances, a person would be liable for a loan sum of approximately 80 to 90 percent of the policy amount.

Have you done the Repayment of Loan?

You can go for a loan against life insurance if you know about the repayment of the loan. The particular loan must be repaid within the term of the policy. It is known that the policyholder owns options like paying off the principal amount including interest or paying merely the interest sum. When you pay off merely interest, it is important to know that the principal amount owed would get deducted directly from the claim amount during the instance of settlement.

In addition to that, whenever a policyholder opts to pay off interest only then in the situation of his/her demise while the loan term continues, the due amount gets deducted from the claim amount. Moreover, the remaining amount gets paid to the nominee. It is important to keep in mind that the policyholder’s dependents will actually not consider as the solitary beneficiaries of that particular policy provided that the policyholder passes away suddenly prior to the repayment of the loan.

When is the Policy is Eligible Loan

If you are assuming that all life insurance policies will be eligible for loans, then you are mistaken. It should be noted that term insurance plans and Unit-linked insurance plans are actually not entitled to loans, as per the IRDA guidelines. However, you can take a loan against conventional life insurance policies and money back policies as well. Therefore, it is vital to first check the kind of your Life Insurance policy which you have and is it is entitled to a loan against the same or not.

The Documents must be Ready and Filled-

In order to avail the loan against life insurance, an insurance policyholder must fill out the loan application form. This form should be attached with the original document of insurance policy. Moreover, the loan amount’s payment receipt, as well as one copy of a canceled cheque, should be properly attached with the application. These documents of Life Insurance policy may be submitted to Insurance Company in some case.

Assess the Interest charged

The interest rate levied for the loan against an insurance policy is basically depended on the premium which is previously funded as well as the total premiums number which is already paid. It is important to know that higher the premium amount and amount of premiums paid, correspondingly lower is the rate of interest levied.

In the majority of cases, banks tie the interest rate with their base rate. The banks deem loans of this kind of nature to be identical to an overdraft facility against assurance of the insurance policy. Therefore, it happens that they could be costly when compared to the loan offered by different life insurance companies. The interest rate of bank loans falls in the range of 10-14%, depending on the kind of insurance as well as the term of the loan. It is known that Life Insurance Corporation of India presently levies interest rate of 9% which should be funded on a half-yearly basis.

Going for a loan against life insurance may seem easy because of its myriad of benefits. However, you should focus on various related aspects regarding when to go for it.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.