Loans and Riders Under Life Insurance Policies

Life insurance is generally viewed concurrently with the death benefit it provides – the money paid out to the policyholder’s family members in the event of his/her death. However, permanent life insurance is beyond just this. Permanent life insurance offers lifetime protection and offers financial security to the dependents/policy beneficiaries in case of the policyholder’s demise(subject to timely premium payments and no misrepresentations in the application process).

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

Additionally, permanent life insurance accumulates sizable cash value and can be leveraged as an advanced financial planning instrument.

A permanent life insurance policy’s accumulated funds can be capitalised upon and directed towards several significant living benefits, to fund critical financial demands.Here are some things you probably did not know your permanent life insurance policy could do:

Education funding

Amongst other uses, one can borrow against the cash value that a life insurance policy accumulates over time and use it to pay for any kind of secondary education, including college. The funds can be accessed with utmost ease without the need to apply for bank loans or go through other financial formalities. It is however advisable to have a word with the financial advisor before tapping into the policy’s accumulated cash value, to check the extent to which it will affect the death benefits.

Entrepreneurship

Banks are usually hesitant to lend money to businesses that are not generating sufficient revenue. As a result, new entrepreneurs need to fund their businesses themselves – either from their personal savings or by borrowing from family/friends. Borrowing from the accumulated cash value of one’s life insurance policy is an often overlooked, but good source nevertheless, to fund a budding business.

Tending to unavoidable family commitments

Taking time off work to tend to one’s aging parents is not something everyone can afford to do, quite literally. However, one could be financially prepared for this kind of a situation to some extent, by tapping into their life insurance policy’s accumulated cash value, as it serves as a temporary financial backup.

Emergency loans

Emergency cash could be needed for a whole range of reasons –debt settlement, saving up for education, saving for children’s future needs, funding medical treatment, funding retirement, etc. In any of these cases, one can take a loan from their life insurance cash reserves. The icing on the cake is that this cash value loan istax-free.

Retirement assistance

The safety provided by a life insurance policy encourages the adoption of an aggressive allocation strategy towards one’s retirement investments. Further, since one can tap into the cash value of the insurance policy to cover the first few retirement years, the retirement investment funds can be allowed to grow for a longer period.

Additional riders

Terminal illness riders and critical illness riders on life insurance policies release a sizable chunk of the policy’s death benefit to the policyholder while he/she is still alive,allowing the usage of the death benefit funds on valid diagnosis of one of the critical or terminal illnesses stated in the policy.These riders’ critical/terminal illness payout is tax-exempt, and beneficiaries also receive the left over face value, untaxed, upon the policyholder’s passing.
Accidental death riders are also referred to as double indemnity or triple indemnity riders on life insurance. These riders pay out double or triple the policy’s face value amount, if the policyholder’s death occurs only as a result of an accident.
Life insurance needs amplify in accordance with changing life situations. For instance, from being single to getting married, having children, getting a major promotion – all these situations drastically increase the need and scope of one’s life insurance cover. Keeping this in mind, guaranteed insurability riders allow the insured person to add additional insurance amounts at specific times/events,at an additional premium. This can be every 10 years, upon getting married, etc. without having to pass a rigid health underwriting process.
Inflation riders account for the ever-growing inflation in today’s economic scenario.
Disability riders could waive off premiums for the time during which the policyholder is disabled and hence unable to work, or may even provide income during the period of disability.
Long-term care riders are essentially return of premium riders, and are increasing in popularity because if these riders go unused, there is no loss of premium - the premiums are returned if the policyholder passes away before a specific age, and the beneficiaries are still entitled to receive the life insurance policy’s face value in the event of the policyholder’s death.
Different companies offer varied no-cost riders. One may not even be aware of certain riders included in the policy that offer additional payout benefits for simple things like the policyholder’s demise far away from home, or the insured passing away in a car accident despite wearing a seat belt, etc.

With so many riders to pick from, and some at no additional cost, it makes sense to clarify with the insurance agent about all included riders when purchasing a online life insurance policy.

Concluding

Life insurance is more than just being a death benefit pay out channel. It is best to discuss with your professional financial advisor, insurance agent/company, to understand how you too can leverage the living benefits of your life insurance in line with your specific needs and situations.

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-12-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).