Loan Against ULIP

Can You Take a Loan Against ULIP?

Yes, you can get a loan against a ULIP, which allows you to use it to get money without any premature withdrawal or exiting your plan. However, a loan against ULIP depends on several factors.

• The product design of the plan mainly influences whether you can get a loan against your ULIP. Plans with a guaranteed or debt fund component are more likely to have a loan facility.
• The terms and conditions of the plan generally state if a loan facility is available.
• Since the loan is given against the fund/surrender value at the time of request, a lower value might have lower loan eligibility.

What is the Eligibility Criteria to get a Loan Against a ULIP?

• Mandatory lock-in time: Most insurers demand that a ULIP policy should have completed at least 5 years of the lock-in period to be eligible for a loan against it. The lock-in duration might vary from insurer to insurer.
• Active insurance Status: You cannot borrow against an inactive policy. Your ULIP policy should be in force at the time of loan disbursement.
• Surrender Value Criteria: The policy should have attained a surrender value. This amount may change depending upon the needs of the lender.
• Assignability. The policy must be assignable to the lender as collateral.

How to Apply for a Loan Against a ULIP?

Getting a loan against your ULIP isn't complicated, but it does follow a set order.

• Check if you qualify first” Insurers have their own conditions, usually tied to how long the policy has run and how much surrender value it has built up. It's worth checking this before you get too far into the process.
• Find out your loan limit: The insurer looks at your policy's surrender value and offers you a portion of it, not the full amount. This keeps part of your investment untouched even while you borrow against it.
• Get your paperwork together: You'll need the loan application form along with your policy documents, ID proof, address proof, and bank statements. Having these ready in one place speeds things up considerably.
• Wait for approval and disbursement: Once the insurer reviews everything and signs off, the money lands in your bank account, ready to use for whatever prompted the loan in the first place, a medical bill, school fees, home repairs, or anything else.

How Does Loan Against ULIP Work?

Below are the steps that will tell you how a loan against ULIP works:

• You will have to complete the lock-in period first. No insurer will give out a loan before the 5-year lock-in period, because the policy has no surrender value.
• The loan amount will also depend on your fund mix. If you have invested in equity funds, you will get up to 50% of the fund value as a loan, and as for debt funds, the amount could go up to 80%. This is because the debt funds are less volatile and the lenders are at a lower risk.
• The interest rates are charged at 9-13% per year, which is cheaper than a personal loan that usually starts at 11% and goes up to 20%.
• Life cover will still continue; in an unforeseen event, the outstanding loan amount will be deducted from your ULIP plan first, and the remaining amount is given to your family.
• Repayment terms are flexible. You can pay the interest alone first during the policy term and settle the principal amount later. You always have the option to clear this in the form of EMIs. If you are not able to pay the amount, the insurer will adjust it against your maturity amount.

How is a Loan on a ULIP Policy Calculated?

The loan value is determined as a percentage of the policy’s surrender value or the total fund value. The lender, their term and conditions and the fund type can influence the final amount of the loan.

Example: You apply for a loan against a Debt ULIP plan with the following terms

Important Things to Consider Before Taking a Loan Against ULIP

Before you apply for a loan against your ULIP, it is important to consider a few things

• Eligibility of your policy: It is important to note that insurers only provide loans against a select few ULIPs. Additionally, a lapsed policy cannot be used to take a loan. Ensure you check these criteria before applying for the loan
• Completion of the lock-in period: A loan against a ULIP cannot be issued if the plan has not completed the 5-year lock-in period. You can apply for the loan if your plan has completed the lock-in period.
• Available loan limit: A minimum loan limit is generally specified under your policy terms. Ensure you check the loan limits and the collateral, i.e. if it is the surrender value or the fund value of your plan.
• Market-linked risks: It is imperative to take the market risk into account since the fund value and the surrender value of your plan can fluctuate with the market. This volatility can affect the maximum amount of loan that can be issued against your ULIP.
• Impact of non-repayment: Although a loan against a ULIP facilitate flexible loan repayments, failing to do so can lead the outstanding debt to be deducted from the surrender of fund value of your plan.

Advantages and Disadvantages of Taking a Loan Against ULIP Policy

The following points summarise the advantages and disadvantages of taking a loan against a ULIP policy

1. Advantages

   • Your units stay exactly where they are. You're borrowing against the value the policy has built, not withdrawing from it, so your fund keeps growing in the background.
   • Since you haven't surrendered anything, your family's protection stays intact through the loan period.
   • The policy itself acts as security, so there's no separate collateral to arrange, and the approval tends to move quicker than an unsecured loan application.
   • Because the loan is secured, insurers and lenders can offer lower rates compared to a personal loan.
   • Some plans let you pay just the interest and settle the principal later; others let you repay both together. That flexibility helps when your income isn't fixed month to month.
   • Most insurers don't charge extra if you clear the loan ahead of schedule, so you're not stuck paying interest longer than you need to.

2. Disadvantages

   • You only get a portion of the surrender value, so if the amount you need is larger than that, this route won't cover the full gap.
   • If you default, the insurer or lender can recover the dues from your surrender value or, in the worst case, from the sum assured, which directly reduces what your family eventually gets.
   • The policy usually needs to have run for a few years and built up enough surrender value before a loan becomes an option, so this isn't something you can use right after buying the plan.
   • Unlike a home loan or an education loan, there's no deduction to offset the cost of borrowing.
   • On top of your regular premium, you now have a loan to service, and stretching yourself on both fronts at once can get uncomfortable if your cash flow tightens.

Fund Value vs Surrender Value in a ULIP Loan

Insurers offer loans against either surrender value or fund value of your ULIP. The following table lists how they are different and how each of them affects your final loan amount.

Difference Between Regular Loan and Loan Against ULIP

Documents Required for a Loan Against ULIP

To apply for a loan against an eligible ULIP plan, it is essential that you pre-prepare the following documents:

• Loan Application Form: Collect the form from your insurer and fill in your details. Ensure you fill in all details correctly.
• ID Proof: Any ID proof, including Aadhaar card, passport or driving licence, can be used as ID proof to confirm your identity.
• Proof of Income: You can submit your salary slip, bank statements or your income tax return as your proof of income.
• Address Proof: You will be required to provide proof of your current address. You can do so by attaching any utility bill to your documents.
• Policy Document: Ensure you attach your policy document. It is used to check the eligibility of your policy for a loan. Note that not every ULIP is eligible to be used as collateral for a loan, and thus it should be clarified beforehand if your ULIP qualifies.
• Bank Statement: Attach your bank statement for 3- 6 months, in order to verify your financial status and transaction history.
• Passport-size photographs: Bring at least two recent passport-size photographs to attach to the documents

Conclusion

Thus, ULIP offer triple functionality to its holders and can act as an insurer, a wealth creator and also as a collateral for a loan. However, before availing a loan against a ULIP, ensure to educate yourself about the terms and conditions offered by the lender so as to ensure the safety of your policy.