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Home Insurance

Should a loan be taken against a life insurance plan?

by InvestPolicy
February 27, 2021
in Insurance, Life Insurance
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should you take loan against life insurance plan
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If you are in a financial crisis, what will you do? Will you choose to take a loan against a bank loan or your life insurance policy? If you take a loan against a life insurance policy, would it be more beneficial? We are going to give you similar information through this article. Through this article, you will know the advantages and disadvantages of taking a loan against a life insurance policy, which will help you in taking the right decision.

Benefits of taking loan against life insurance policy

There are many benefits of taking a loan against a life insurance policy, some of which are –

Can get more loan amount

How much loan you can take against a life insurance policy depends on its surrender value (surrender). Therefore you cannot get a loan against a term life plan, although endowment plans (endowment plans) or traditional money back plans offer this kind of facility. Insurers generally allow policyholders to take loans up to 80–90% of the surrender value of the policy. For example, if you have an insurance cover of Rs 50 lakhs in the endowment plan and its surrender value is Rs 20 lakhs, you can get a loan up to a maximum of Rs 17-18 lakhs.

Loan can be available at a lower rate of interest

The interest rate on such loans is lower than traditional unsecured loans. If certain years of insurance premiums have already been paid, insurance companies offer lower interest rates on this type of loan. The higher the premium amount, the lower the interest rate.

Get a quick loan

Due to factors such as fast approval and minimal paperwork, it is easier to take a loan against life insurance than traditional loans. The application process of such loans is easier than that of bank loans and its process also takes less time. The borrower against the insurance gets the loan within a few days and can use it, as the policy holder is already a verified person. Money is usually received within 3 to 5 days of applying for a loan.

No more investigation is required

In this type of loan, you keep your insurance plan as collateral, so in case of default, the insurer is protected and that is why you get the loan at a lower interest rate. You pledge your policy to the lender, so your loan is considered a secured loan. This type of loan also has less checks as compared to other loans.

Common disadvantages of taking loan against life insurance

There are some disadvantages as well as benefits from taking a loan against life insurance, which are as follows –

Low loan amount is available in the initial years

If you believe that the loan against insurance depends only on the surrender value of the policy, then it is your foolishness. You have to deposit some amount in the policy before taking a loan against insurance. Even if the pre-approved loan has been mentioned in your policy, you can get the loan only when the money is equal to the surrender value in the policy. For this, you have to pay a regular premium for at least 3 years from the date of purchasing the policy.

This type of facility is available in limited life insurance plans

Not all life insurance plans have loan facility. You cannot take a loan against a term insurance policy, as there is no benefit at the time of maturity. Similarly, most ULIP plans also do not have loan option. Loans are offered on traditional plans such as money-back policies, endowment plans and life insurance plans. These schemes have surrender value. Since these schemes are used to create a corpus in the long run, they provide loan facility.

There is a waiting period

The policy holder cannot apply for a loan before the waiting period. Life insurance policies that provide credit have a waiting period of about three years. During this time you have to pay on time and regular premium. The loan is sanctioned only to those individuals who pay the premium on time with responsibility.

One should never think of loan facility when deciding to buy a policy. Because insurance plans are usually purchased to take insurance cover and provide financial protection to their dependents. But you can get a loan against your policy in severe financial crisis. If you are not able to arrange money through bank loan or family and friends, then this can be a great option for you. But repay the loan taken against the policy as soon as possible. Along with this, you will also have to pay insurance premium along with your loan EMI to keep your policy running. The policy lapses in case of default in repaying the loan or default in paying the premium. So before taking this type of loan consider it well and pay the loan on time.

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