When faced with cash crunch, taking an unsecured loan is not the only option you have. You can also utilize your insurance policies to avail a loan. Your insurance policy offering protection and long-term financial security can help during times of financial difficulty as well.
Let’s dive in to know more about loan against insurance:
1. Which Policies are Eligible for Loan?
Life insurance policies, such as endowment policies , unit-linked insurance policies and money-back policies, for which premiums are paid for at least three years are eligible for loan. Term insurance is not eligible for loans because it doesn’t have any surrender value.
2. What are the benefits of loan against insurance?
Loan against insurance offers the following benefits:-
CIBIL Score:- Banks do not check CIBIL score at the time of sanctioning loan against insurance. Therefore, for people with low CIBIL score, this option is very useful as you can get a loan without hassles.
Low interest rate as compared to personal loans:- Loan against insurance is one of the best alternatives to personal loans. On an average, interest rates on a personal loan vary between 12% and 24%, whereas the interest rate on a loan against insurance is between 10.50% and 12.50%.
Quick loan amount disbursement:- The documentation is minimal and there are fewer chances of rejection. As a result, the loan gets sanctioned rather quickly.
3. What is the loan amount and interest rate?
The loan amount depends on the type of insurance policy and its remaining tenure. For instance, Birla Sun Life allows a minimum loan amount of Rs 25 lakh against the policy.
Note that the process to compute the loan amount is different for ULIPs and traditional insurance policies:-
ULIPs: The sanctioned loan limit depends on the current market value of the corpus. If more than 70% funds are invested in equity, you can get a loan for up to 40% of the corpus. However, very few companies offer loan against ULIPs.
Traditional insurance policies: Up to 80%–90% of the surrender value can be sanctioned as the loan amount, provided the insured has paid all premiums regularly for at least three years.
4. What is the interest rate for loan against insurance?
The interest rate for loan against insurance depends on the amount and installments of premiums paid. The more the premium amount and installments, lesser will be the interest rate. Usually, banks link the interest rate with their base rate. Life Insurance Corporation of India charges 9%, to be paid half-yearly, whereas Bank of India charges 13.15%.
5. How is your loan eligibility decided?
In case of ULIPs, loan against insurance is usually offered up to 70%–75% of the paid up value. In traditional policies, it can go up to 85%–90%.
6. What tax benefits are available if the loan amount is used to buy or construct a house?
Interest on loan against insurance is allowed as a deduction from income chargeable under the head ‘income from house property’. However, the loan amount should be used by the insurer to re-construct, repair or renew the property.
7. What happens if you fail to repay?
The insurer will give you a repayment schedule though you are at liberty to pre-pay or foreclose the loan without any charges. Repayment clauses vary from one insurer to another. In case the insured fails to repay the loan, the policy will lapse.
Any default in loan repayment can have a huge impact on the policy benefits. If the insured dies without repaying the loan, the insurer will provide death benefits to the beneficiaries after deducting the due amount and interest rate. If you fail to repay, the loan amount will increase due to the compounding effect and the unpaid amount will be added to the outstanding principal amount. The policy is terminated when the outstanding premium and interest amount is equal to the surrender value. In this case, the policyholder will lose the insurance coverage.
8. What is the drawback of mortgaging the insurance policy?
The biggest drawback in mortgaging your insurance policy is that if there is a death of the policyholder during the term of the policy, the nominee will not get the full policy benefits. The lender will deduct the outstanding loan and interest before paying to beneficiaries.
9. How to apply for a loan against insurance?
The first step is to ask the insurance company or the bank about the eligible loan amount. The next is applying for the loan and assigning the policy to the insurance company/bank. It means all rights on the policy will be transferred to the lender. Thenmention the details of the policy and the loan amount in the format prescribed by the lender. Banks charge processing fee and other charges in addition to the interest rate. The loan may be sanctioned in 2–3 days; however, it may vary from one company to another. Once the loan is sanctioned, all rights on the policy are automatically transferred to the lender after the loan disbursement. Upon the repayment of the loan, lender will reassign the policy to an insurer by an endorsement.
10. What documents are required?
You need to submit the following documents to avail loan against insurance:-
Original Insurance Policy
Deed of Assignment