Insurance policies are now regarded as significant collateral against bank loans. Life Insurance Corporation (LIC) of India has already confirmed banks are the largest lenders of personal loans. However, apart from LIC, several other life insurers, such as Edelweiss Tokio Life, as well as other banks, including HDFC Bank and the State Bank of India, provide loans to consumers against insurance policies.
Loans against insurance policies are only approved when traditional policies like money-back and endowment plans are committed. Banks accept these products since they include life insurance as well as savings features. Unit-linked insurance plans and term insurance coverage are typically not accepted as collateral.
In this article, we will discuss how one can take a loan against their life insurance policy.
To borrow against your life insurance, you must have a policy with cash value, which is often found in permanent life insurance policies. Term life insurance is ineffective in this situation since it has no monetary value. To have enough cash value in your life insurance is also important because you have to use it as collateral for the loan.
Some life insurance companies allow you to apply online, while others may need you to fill out a paper application. If you can’t locate any information on how to begin the procedure, call your insurer. Depending on the regulations of your insurance provider, you may be able to complete the loan request over the phone.
The surrender value must be acquired by the policies if the applicant is to gain eligibility for the loan. The policy must be assigned to the insurer, and insurance firms typically provide between 85 per cent to 90 per cent of the surrender value. LIC charges a 10 per cent interest rate, which must be paid every half-year.
The repayment terms are quite flexible, and LIC also offers clients the option of making solely interest payments, with a provision for deducting the loan amount from the claim amount when it comes time to settle the loan. The repayment method and interest rates will change depending on the bank or lender from whom you seek to obtain the loan. However, the interest rates are lower than what banks charge for secured loans. They are also far lower than the rates connected with personal loans.
Here is a step-by-step guide to taking a loan against the life insurance policy
Step 1: Eligibility
Check policy eligibility as only traditional policies like money-back or endowment policies offer this facility.
Step 2: Surrender value
Check to see if your policy has a surrender value after paying premiums for at least three years from its beginning as only policies with a surrender value are eligible for a loan.
Step 3: Calculate the loan amount
The loan amount depends on the surrender value and insurance firms typically provide between 85 per cent to 90 per cent of the surrender value.
Step 4: Suitable lender
Always compare offers from different lenders and check their terms and conditions.
Step 5: Application
After doing all the above things, complete your application form, submit original policy documents, a cancelled cheque, and a payment receipt for the loan amount.
