What is Loan Against Life Insurance Policy? : Eligibility. Document and How to Apply

Can I Take a Loan Against My Life Insurance Policy?

Yes, you can do that. Many life insurance policies in India offer a savings feature that allows you to borrow money against the policy. You can get emergency money this way without compromising your long-term financial plans or losing your insurance. Before you borrow money against your life insurance policy, let's figure out how it works, who can apply, and what you need to know.

What is a Loan Against Life Insurance Policy?

A loan against life insurance is a secured loan, meaning you pledge your life insurance policy as collateral to get funds. The loan is backed by the cash value or surrender value of your policy, not the total sum assured.

The surrender value is the amount you would get if you canceled the policy before it ended. Lenders like banks, insurance companies, and NBFCs will let you borrow a certain percentage of this value. Most of the time, this percentage is between 80% and 90%.

This type of loan is perfect for people who need money right away but don't want to sell their investments or pay high interest rates on a loan.

Let's break it down and see what "Loan Against Life Insurance Policy" means.

You can get a secured loan by using your life insurance policy as collateral.

1. How Does It Work?

   The bank or insurance company gives you a loan based on how much your life insurance policy is worth if you give it up.

2. Who Can Avail This Loan?

   Anyone with a traditional life insurance policy that has built up a surrender value can apply.

3. What Are the Benefits?

   You gain quick access to funds at lower interest rates without needing to liquidate your policy.

4. Why Get a Loan Against Your Life Insurance?

   It helps you meet your immediate financial needs while keeping your life insurance in place and your long-term goals on track.

5. Can you get a loan on any life insurance policy?

   According to the IRDAI, term insurance plan cannot be used to get loans. In general, only plans that build up a cash value or surrender value over time can be used as collateral for a loan.

How Does a Loan from a Life Insurance Policy Work?

When you ask for a loan, the lender or insurer looks at the policy's surrender value to figure out how much money you can borrow. Once you get the money, the policy temporarily becomes the lender's collateral until the loan is paid back.

Here's what you should know about how it functions:

• Amount of the loan: You can usually borrow 80–90% of the policy's surrender value.

• Ownership: The lender owns the policy rights as long as the loan is active. You will get those rights back once you pay off the loan in full.

• You can pay back the loan in full or in installments, or you can just pay the interest on it from time to time. If you choose the latter, the unpaid principal will be taken out of your death benefit or maturity benefit later.

• Coverage Continuity: As long as you keep paying your regular premiums and follow the loan repayment terms, your policy coverage will stay in effect.

How Much Amount Can I Loan With Life Insurance?

Instead of the policy’s total sum assured, the surrender amount is considered for availing such loans. The surrender amount is available only in cases where a premium is paid for plans for at least 3 years. Most banks provide 80% to 90% of the surrender value as a loan from the insurer.

What are the Features and Benefits of Taking a Loan Against Life Insurance Policy?

Taking a loan against an insurance policy can provide you with the following benefits:

• Banks do not check CIBIL scores when sanctioning loans against insurance. Therefore, this option is very useful for people with low CIBIL scores as you can get a loan without hassles.

• Loan against insurance is one of the best alternatives to personal loans. On average, interest rates on a personal loan vary between 12% and 24%, whereas the interest rate on a loan against life insurance is much lower.

• The documentation is minimal, and there are fewer chances of rejection. As a result, the loan gets sanctioned rather quickly.

What is the Maximum Loan Amount and Interest Rate?

The maximum loan amount depends on the type of life insurance policy and its surrender amount. The loan amount is generally a percentage of the policy’s surrender value. The loan amount can range from 80-90% of the surrender value in the case of endowment or money-back plans. Various insurers consider around 50% of the total premium paid to compute the maximum loan amount.

The interest rate for a loan against insurance depends on the amount and installments of premiums paid. The higher the premium amount and installments, the lesser will be the interest rate. Usually, banks link the interest rate with their base rate. Life Insurance Corporation of India charges 9%, to be paid half-yearly, whereas Bank of India charges 13.15%.

What is the Eligibility Criteria And Documents Required to Avail Loan Against Life Insurance Policy?

Below are the eligibility criteria for loan against life insurance policies:

• The life insurance plan should be accepted by the lender

• The loan can be opted by individuals, partnerships, sole proprietorships, companies, or HUFs.

• Both self-employed and salaried individuals are eligible

• Borrowers should be between 18 and 90 years of age.

How is your loan eligibility decided?

In the case of ULIPs, a loan against the life insurance plan is usually offered up to 70%–75% of the paid-up value. In traditional policies, it can range from 85% to 90%.

What Documents are Required to Avail Loan Against Life Insurance?

You need to submit the following documents to avail of a loan against life insurance:

• Original Insurance Policy

• Deed of Assignment

• Cancelled Cheque

• PAN card

• Recent passport sized photographs

• Passport/Aadhaar card/Voter ID card as address proof

What Happens if You Fail to Repay Your Loan Against Life Insurance?

The insurer will provide you with a repayment schedule; however, you can prepay or foreclose the loan without incurring any additional charges. Repayment clauses vary among different insurers. If the insured fails to repay the loan, the policy will lapse.

Any default in loan repayment can have a huge impact on the policy benefits. If the insured dies without repaying the loan, the insurer will provide death benefits to the beneficiaries after deducting the due amount and interest rate. If you fail to repay, the loan amount will increase due to the compounding effect, and the unpaid amount will be added to the outstanding principal amount. The policy is terminated when the outstanding premium and interest amount equals the surrender value. In this case, the policyholder will lose the insurance coverage.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

What is the Drawback of Taking a Loan Against the Life Insurance?

The biggest drawback in taking a loan against your life insurance policy is that if the policyholder dies during the term of the policy, the nominee will not get the full policy benefits. The lender will deduct the outstanding loan and interest before paying to beneficiaries.

How To Apply for a Loan Against Life Insurance Online?

Step 1: Click on ‘Apply’ available on the website of the lender or online portal to start the process. This helps you find the application form for applying for a loan online.

Step 2: Enter your personal details like date of birth, name, contact number, and PAN. This allows the lender to make your preliminary profile of the loan.

Step 3: Enter your valid email address and then check it by clicking on the link that was sent to your inbox. This makes sure that communication is safe during this process.

Step 4: Enter the details of your policy, like the name of the insurer, the type of plan, and the policy number. This information helps you figure out how much you can borrow and how much you can give up.

Step 5: You will get a personalized loan offer with the amount and interest rate that are right for you based on your eligibility and the value of your policy.

Step 6: Upload your KYC documents which helps confirm your address and identity for approving the loan.

Step 7: Register for an e-mandate to start automatic EMI payments. This makes sure repayments are on time without any manual tracking.

Step 8: Go through the T&Cs of repayment and agreement. After accepting, the lender prepares the loan for your last approval.

Step 9: Provide the documents of your policy and the lender will assign temporarily to secure the loan.

After the verification, the loan amount that is approved is credited directly to your registered bank account within a short tenure.

Wrapping It Up!

While the protection cover provided by a life insurance policy is its important benefit, the facility of loan is valuable additional benefit. Always go through the terms and conditions of the bank before applying for a loan against life insurance policy to avoid discrepancies in long time.

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