How to Get a Loan Against Life Insurance Policy?

What is a Loan Against Life Insurance Policy?

A loan against a life insurance policy is a secured loan that lets you borrow money against your policy's surrender value without losing your life cover. The size of the loan depends on the accumulated surrender value over time. However, traditional life insurance plans such as endowment, money-back or whole life policies that have completed the required lock-in period may be eligible for a loan.

One of the main advantages of this option is that the policy itself is security and therefore the interest rate is lower than on personal loans or credit cards. There is also very little paperwork involved as the lender doesn’t need to carry out extensive credit checks due to the low risk nature of these loans.

Features & Benefits of Loan Against Life Insurance Policies

• You can take a loan against eligible endowment or ULIP policies to meet different financial needs.

• You can access the funds without surrendering your policy, so your life cover generally continues.

• You have the flexibility of taking out a loan based on your insurance policy, such as an endowment or a ULIP policy, allowing you to make several withdrawals and pay interest only on the amount you use.

• After the lock-in period has ended, borrowers of loans that were subject to the lock-in period may pay both the principal and the interest at that time.

• The approved loan limits vary from small to large amounts in order to meet the different needs of the policyholders. The maximum loan amount may be up to 90% of the policy's surrender value. .

• You have the option of paying off your loan at any time without having to pay any extra fees.

The process for applying for the loan involves very little paperwork and simply requires your basic identification, proof of address, your bank details, and your insurance policy documents.

How To Apply for a Loan Against a Life Insurance Policy?

Follow the steps below to get a loan against life policy:

Step 1: Get in touch with your life insurance company to find out about policy loan options.

Step 2: Fill out the required forms and send in any requested documents.

Step 3: Find out about the loan terms, the interest rate, and the repayment process.

Step 4: Decide how much you want to borrow based on your policy's cash value

Step 5: Make sure to pay on time so that your policy's benefits or coverage don't change.

*Note: If you have any questions about your life insurance policy or the loan you took out against it, you can call the insurance advisor to get answers.

How a Life Insurance Loan Works?

When you borrow money against your life insurance policy, the insurance company or the lender will use the surrender value of the policy as security. Policies that build a cash or surrender value, such as eligible ULIPs and endowment plans, may qualify for a loan. After approval you will get the money without having to cash in the policy, and the policy will remain in force.

If you are not able to repay the loan, the amount you owe will be taken out of your claim or your maturity payment.

What Types of Life Insurance Policies Can You Borrow From?

You can borrow from permanent life insurance policies that build cash value, like Whole Life and Universal Life, as well as Endowment and Money-Back plans. These loans use your own money, don't require a credit check, and stay active as long as the loan plus interest doesn't go over the cash value. If you don't pay them back, the death benefit will be less.

On the other hand, a loan against term insurance is usually not possible, as they do not accumulate cash or have a surrender/maturity value.

What is the Eligibility for a Loan Against a Life Insurance Policy?

• The life insurance plan should be approved by the lender.

• This loan is available to individuals, companies, partnerships, sole proprietorship, and HUFs.

What Are The Documents Required To Take A Loan Against Life Insurance Policy?

To get a loan against life insurance policy, you need to show these documents:

• A passport sized photograph

• A copy of your ID, like your Aadhaar Card, Passport, or Voter's ID

• A copy of the PAN card

• Insurance policy papers

• A bank statement or a copy of a canceled check (as proof of a bank account)

• More documents, as the insurance company asked for to confirm

What To Keep In Mind While Taking A Loan Against Life Insurance Policy?

There are several factors that one needs to bear in mind before opting for a loan against life policy:

• Loan Amount
  The loan amount under a loan against insurance policy depends on the policy’s surrender value. Usually, a percentage of this value is approved, after which the policy is assigned to the lender as security. The amount received is not treated as taxable income.

• Interest Charged
  Interest on a loan against life insurance policy is based on the premiums paid and the total number of premiums completed. Higher paid-up value often means a lower rate. Banks generally link the rate to their base lending rate.

• Waiting Period
  You cannot apply immediately after buying the policy. Most insurers require a waiting period of at least 3 years of premium payments before you can apply for a loan

• Premiums
  Even after taking a loan against life policy, you should continue paying premiums. If you stop paying the premiums, the insurer might terminate the policy, which can affect both the cover and the loan arrangement. You can use a term insurance calculator to see how much premiums you have to pay for your desired life cover.

• Repayment of Loan
  A loan against life policy should ideally be repaid within the policy term. You may repay both principal and interest, or only interest. If unpaid, the outstanding amount is deducted from the final claim payout.

• Deed of Assignment
  To process a policy loan insurance request, the policy must be formally assigned to the lender. This is done through an assignment deed, and the endorsement is recorded on the policy document.

• Charges
  Insurers or banks may levy nominal processing charges when approving a loan against insurance.

*Note: It is recommended that you first know what is term insurance and understand its features, benefits and exclusions before you buy term plan or get loan against life insurance policy.

What Are the Risks of Taking a Loan Against Life Insurance?

• The death benefit will be reduced by any loans that have not been paid off together with the interest, meaning that your family will receive an amount that is less than the original value of the policy.

• There is a risk of the policy lapsing: if the amount of the loan plus the interest owed exceeds the cash value still available, the policy could lapse without your knowing and you would then be left without insurance coverage.

• The cash value will grow more slowly since the fund is used as security for the loan and therefore part of your fund is tied up in the loan and so the amount it earns over time is reduced, as a result of which your future bonuses or dividends will be less than they would have been.

Should You Take a Loan Against Your Life Insurance Policy?

A loan against your life insurance policy makes sense when you need cash quickly and don't want to touch your savings or take an unsecured loan at a higher rate. It's fast, doesn't need a credit check, and your policy stays in your name throughout. That said, it isn't free money. Failure to make repayment will result in the outstanding loan and interest being adjusted against your claim or maturity amount and in some cases, the policy may even lapse if the loan amount exceeds the surrender value. So before you go ahead, weigh up how urgently you need the funds, against how it could affect your family's payout later. If you are confident of repaying it on time, it is a practical choice. Otherwise, it is worth looking at other options first.

Note: You should also check the benefits of term life insurance if you are planning to purchase the term insurance plan.

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