An insurance policy is meant to offer monetary protection to you and your loved ones against death, accidents and healthcare expenses, based on the variant you choose. However, you can address short-term financial needs and emergencies as well by borrowing money against the life insurance policy.
Availing a loan against a loan insurance policy has many perks such as a hassle-free application process, lower interest rates compared to unsecured loans and high-value loan sanction, among others. However, you must have all the information about it before applying so that you can make the right decision.
Take a look at 5 things you must know.
Lenders sanction loans only against select insurance policies
Mostly, lenders don’t sanction a loan against all insurance policies. Some lenders only accept whole life, endowment, and money back policies as collateral and others accept term policies and ULIPs. For instance, Bajaj Finserv offers a Loan Against Insurance Policy against Bajaj Allianz ULIPs. Such a loan by gives you access to a high-value sanction amount of up to Rs.10 crore that you can repay conveniently in 12 months.
In addition to this, you can enjoy a low loan against the insurance policy interest rate. Lenders also offer services such as a disbursal within 72 hours, a dedicated relationship manager, and nil foreclosure and prepayment charges. Apart from insurance, financial institutions these days also offer finance against other investments such as shares, ESOPs, FMPs, bonds, and mutual funds.
Lenders require you to serve a waiting period before applying
If you apply for a loan against insurance policy immediately after availing the policy, chances are that your application will get rejected. Lenders require you to wait for at least three years before borrowing money against the life insurance policy. So, discuss with the lender and your insurer before applying. Also, increase your chances of loan approval by paying premiums regularly.
Lenders have their set loan to value ratio, which is usually 50%
Don’t approach the lender thinking that you will receive a loan amount equal to your insurance policy’s value. This is because lenders don’t sanction the entire policy amount as a loan, but sanction an amount based on the surrender value of the policy. Surrender value is an amount that you can expect to receive in case you wish to terminate the policy before it matures.
Most lenders offer a Loan Against Insurance Policy only up to 50% of its surrender value. For instance, if a policy’s surrender value is Rs.1 crore, you are eligible to receive a loan amount of up to Rs.50 lakh only. Naturally, the older your policy is, the higher is the loan amount you will get.
Lenders offer a short repayment tenor on such loans
Loans against life insurance policies are short-term loans. Hence, even though the tenor differs across lenders, it is typically around 12 months. However, some lenders make repayment convenient by offering certain beneficial features. The Flexi facility by lenders helps you manage your cash flow better. Not only can you withdraw from the sanction as per your needs, but you can also pay interest only on the utilised amount. In addition, you can choose to pay interest-only EMIs and repay the principal at the end of the tenor to save up to 45%!
Lenders may terminate your policy in case you default on the loan
When you borrow money against a life insurance policy, you pledge your policy and give the lender a right of lien over the same. So, if you default on repayment or even on premium payment, your policy can be terminated. Not only this, the insurer is entitled to recover the interest and outstanding loan amount by deducting it from the surrender value. Therefore, make sure that you have the means to repay the loan before availing it.
So address your financial needs like a pro by borrowing money against life insurance policy when you find yourself in a tough situation. Check your pre-approved offer from lenders including NBFCs to view customized deals and achieve your financial goals conveniently without any delays.
Loan against insurance policies is very useful for addressing your short-term financial needs without the need to liquidate your securities. Thus, you get the benefits of both. Your insurance continues protecting you like before and your loan helps you mitigate your financial needs. Thus, you get to win on both the fronts.