Using Your Insurance Policy to Secure a Loan

Gone are the days when insurance was purchased just as a protective cover. Nowadays, people have become wiser about their money and so look to get the most out of their investments, in every department possible. And while many still believe that insurance should not be used as an investment, others disagree. From investments and tax savings to securing loans, insurance plans are used for a number of purposes. Have you ever considered taking a loan against your insurance plan? Well, if you are speculating the concept, then you will be happy to know that there are a number of benefits associated with it. Read on to know more.

Loan against insurance – How it works

Insurance companies as well as most leading Indian banks provide you with a loan against your insurance policy. To avail the loan, you have to use the insurance policy as the collateral. It therefore becomes a secured loan. All policies, apart from term insurance policies, can be used to secure a loan. In other words, a plan that has a maturity benefit can act as your collateral. To get a loan, you must:

  • Submit the original policy documents to the bank/insurance company.
  • Have a policy that is at least three years old with all the premiums paid on time.
  • Have a non-term plan that has a monetary award associated with it.

Loan against insurance – The Pros

There are many advantages of taking a loan against an insurance policy. They are:

    • Secured loan – Since the loan is a secured loan, it becomes cheaper than a personal loan. This is one of the biggest advantages of taking a loan against an insurance policy.
    • Quick and hassle-free – When you apply for such a loan, there is no background check conducted, neither is your credit history analysed. You only need to submit the original policy document and a loan application form and your loan is sanctioned. This makes it very easy and quick to secure a loan against your insurance policy.
    • High loan amount – You can take as much as up to 90% (in traditional plans) of the paid up value as a loan. Depending upon how much your policy is worth, you can adjust the loan amount.

Loan against insurance – The Cons

There are some disadvantages of taking a loan against your insurance policy as well. They are:

    • Reduces the death benefit – If you happen to die without repaying the loan, the bank or insurance company will deduct the unpaid amount from the cash value of the insurance plan. This may seriously affect your beneficiaries after your sudden death.
    • Policy lapse and tax pile – When a loan against an insurance policy lies unpaid, the policy lapses and the taxes and interests pile up. This may again become a liability for your beneficiaries if the loan remains unpaid in your lifetime.
    • Repayment – Most insurance companies, including the Life Insurance Corporation of India, have strict rules regarding the loan repayment. LIC disburses the loans for a minimum tenure of six months. Even if you are capable to repay it sooner, you will have to keep the loan active for six months and pay the interest.

Loan against insurance v/s Personal Loan

Both, a personal loan and a loan against an insurance policy, can bail you out of a sudden financial crunch. There are however some parameters to consider when choosing an insurance loan over a personal loan. Like mentioned above, a loan against your insurance policy is a secured loan and so you end up paying lesser interested and saving more money. Perhaps you will be able to borrow more from a personal loan since the insurance loan amount will be decided by the cash value of your plan, but then your whole credit score will be put on the line, something that is not touched while taking a loan against your insurance policy.

Conclusion

So as we can see from the points mentioned above, there are some very good advantages of taking a loan against your insurance plan. There are some disadvantages too and so you must consider each and every point before you seek a loan against your insurance policy.

You may also like to read : How to Get Loan Against Life Insurance

Written By: PolicyBazaar - Updated: 23 September 2020
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
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