It’s natural to have some situations in life where you may be in urgent need of funds. When unanticipated expenses crop up and quick access to funds is the need of the hour, it’s good to have multiple options. If you have bought a life insurance policy, then you’ll be glad to know that you can get a loan against it. Taking a loan against your life cover can prove to be helpful and more advantageous than other loans such as high-cost personal loans. Here’s everything you need to know about availing a loan against your life insurance policy.
There are two main aspects of eligibility for a loan against life insurance cover:
- Type of life insurance policy
Only traditional life insurance policies such as endowment plans, whole life insurance, etc. are eligible for such loans. Unit-linked insurance plans may also be eligible depending on the insurance company. However, term life insurance plans are not eligible for this loan facility as they don’t come with a surrender value.
- Three-year waiting period
The loan facility is only available once your life insurance policy is older than three years. This is to ensure that you pay your premiums regularly and don’t tend to default.
- Loan amount
For a loan against your life insurance policy, the surrender value of your policy is considered. Surrender value is the amount of money you would get were you to cancel your life cover before the policy period ends. Usually, you can get a loan amount equal to 80% to 90% of your life cover’s surrender value.
For instance, if your life cover is for Rs 60 lakh and the surrender value is Rs 35 lakh, you could get a loan for around Rs 28 lakh or more. This is a unique benefit of loans against life insurance policies because such a high amount is difficult to get approved for loans like personal loans. It’s important to note, however, that the earlier you opt for a loan in your policy term, the lower will be the surrender value and hence, the lower will be the loan amount.
- Rate of interest
A loan against your life cover is a secured loan as the lender has the surrender value of your life insurance policy as a collateral. Hence, the rate of interest for such type of a loan is typically lower compared to unsecured loans.
While unsecured loans like personal loans may have an interest rate ranging from 15 to 18%, you can get a loan against your life insurance policy in the range of 10 to 12% depending on the insurance company. An essential factor that’s considered here is the amount of premium already paid. So, the more the premium already paid, the lower will be the rate of interest. If you’re yet to buy a life insurance policy, you can get more clarity on the premium by using an online life insurance calculator.
- Terms of repayment
You have to continue paying your life insurance policy premiums even after availing a loan against it. As for the repayment of the loan, it’s similar to other loans. You’ll be required to pay Equated Monthly Installments (EMIs) including the interest and the principal. A default in either the payment of premium or the EMI payments of the loan will lead to a lapse of your life cover.
In case of a default in either of the payments leading to the lapse of the policy, the insurance company will recover the loan amount from the surrender value of the policy.In the event of the demise of the policyholder, the remaining loan amount and interest will be recovered from the death benefit that is payable as per the life insurance policy.
The loan facility available against your life cover is a simple and straightforward way to access funds quickly. The processing and disbursement time for such a loan is quick because there is minimal paperwork and formalities involved. Your life insurance policy acts as security against which the loan is given out so the process of availing the loan is seamless.