The Insurance Regulatory and Development Authority of India (Irdai) enables policyholders with the benefit of procuring loans against their life insurance policies.
A policyholder may need some funds in an emergency, and their life insurance policy can come in handy in such cases.
What is a Loan Against Policy
A loan against a life insurance policy can help policyholders get funds by pledging their policy as a collateral. This facility of availing a loan against policy is available for traditional policies, such as moneyback and endowment policies, usually the ones that have both savings and life cover components.
However, unit-linked insurance plans (Ulips) and term insurance covers are commonly not eligible as a pledge for loans.
Loan Amount and Eligibility
In order to be eligible for a loan against a lifeinsurance policy, the policy will need to have a surrender value.
Usually, the sanctioned loan amount is between 85 per cent and 90 per cent of the policy’s surrender value.
Rate of Interest and Repayment
Loans borrowed against insurance policies commonly have more suitable terms when compared with other forms of secured loans or personal loans. The rate of interest is usually lower, which means borrowers can save funds or interest amounts over the tenure of the loan.
Meanwhile, the repayment tenures are flexible, offering the policyholder the choice to make interest-only payments if required.
An additional advantage of these types of loans could be that borrowers will have the choice to deduct the loan money from the claim when it is settled. This will help eliminate the onus of repayment and possibly make it simpler for borrowers to get the funds they require. Loans against an insurance policy can prove to be a cost-effective and convenient option for those in need of funds.
How to Get a Loan Against Insurance?
The loan is sanctioned relatively fast, usually within seven days of submitting an application.
Even if a policyholder has a relatively low CIBIL Score, they are still eligible for getting this kind of loan.
The first step would be to ensure the policy has a surrender value and can be given in favour of the lender.
The policyholder can reach out to the insurance provider or a bank that gives loans against insurance policies. Major lenders, including banks, non-banking financial companies (NBFCs) and insurance providers, offer this service.
What Happens If Borrower Fails to Repay?
In case the borrowers fail to repay the loan, they will have to face increased interest over time, which will reduce the maturity amount of the policy.
Additionally, in case of unfortunate death before loan repayment and interest amount, the insurance provider has the right to deduct the amount from the policy’s maturity value before they release the amount. The insurance provider also holds the right to terminate the policy in case the borrowed loan, with interest, exceeds the policy’s maturity amount to recover the dues.
