The dynamism of an insurance policy makes it a multi-facet financial product. It is a popular protection instrument that has steadily evolved to offer additional benefits. An insurance policy is useful in tax^* planning and generating wealth over time. Besides, you can also avail a loan against an insurance policy.
 

If you experience a sudden need for money to combat emergencies, your insurance policy can help in arranging the funds. It acts as a safeguard in unexpected cash crunch situations. This article addresses the various parameters around how to secure your loan with an insurance policy.
 

What is Loan against Policy?
 

An insurance policy has become one of the most versatile financial instruments. You can also resort to it for availing a loan facility. When you get a loan by offering your insurance policy as a security, it is a loan against the policy. Here your life insurance policy acts as the collateral, thereby making it a secured loan.
 

How to Get Loan from Life Insurance Policy?
 

Many bankers and insurance companies provide loans against insurance policies. TATA AIA Life is a reputed name in the insurance domain offering tailor-made insurance products along with policy loans. You may approach a TATA AIA Life Insurance Consultant to initiate the loan process.

However, ensure that you read all the guidelines of the loan application process and the terms and conditions of repayment before proceeding with getting a loan against your insurance policy.
 

Some Important Points for Loan Against Insurance
 

• Eligibility - Loan against insurance policies are given on the surrender value. This is the amount that the policyholder receives on a pre-mature exit from the policy. Besides, it is important to know what life insurance you can borrow against. Policies with maturity benefits can act as security for the proposed funding. Hence, term insurance is not eligible to avail a loan. Besides, the policy submitted as security should be at least three years old. It should also have a track record of timely premium payments.
  
  
• Loan Amount - The loan amount is usually a percentage of the surrender value. In the case of Unit Linked Insurance Plans (ULIP¹), the loan amount depends on the market value of the corpus along with the fund type.
  
  However, some ULIPs are not qualified for availing loans. Hence it is important to check on the eligibility with your insurer.
  
  
• Interest Rate - The rate of interest depends on the amount and number of premiums paid. The more amount and more number of premiums paid, usually vouch for a lesser interest rate. Bankers link the interest rate with their base rate; hence any changes in the base rate influences the interest costs. Moreover, they consider the loan against the policy as an overdraft facility. Hence the bank’s interest rates are normally more than that of an insurance company.
  
  
• Repayment - The lender intimates the repayment schedule. It is typically spread across the policy period. You may opt to repay the principal amount along with interest payments or make only the interest payments. In the latter case, the principal amount gets deducted from the claim at the time of settlement. Similarly, in case of the demise of the policyholder during the policy term, the nominees receive the net amounts post adjustment of the dues.
  
  Defaults in the loan availed can result in the foreclosure of your policy for recovery of the dues. Hence it is important to ensure timely repayment of the obligations. 

   

What are the Documents Required to Avail Loan Against Insurance?
 

You must submit the prescribed application form, along with the original policy document. Besides, the policy is assigned favouring the lender through a deed of assignment. This makes the lender eligible to receive the policy benefits during the policy term. You must continue to pay the remaining premiums as per the schedule.
 

The Benefits and Concerns of an Insurance Policy Loan
 

It is beneficial to avail a loan against a life insurance policy, owing to the below benefits.
 

• Secured Funding - A policy loan is a secured loan, and hence offers interest rates lesser than unsecured personal loans. This aids in enjoying decent savings in the form of reduced interest rates.
  
  
• Quick and Easy - The loan gets sanctioned majorly based on your insurance policy. It does not include multiple processes as in the case of other funding types. An application form, along with the policy documents, supports the sanctioning procedure. Thus the process of availing policy loan is seamless and hassle-free.
  
  However, the policy loan comes with a few concerns, as listed below.
  
  
• Repayment - Some insurance companies disburse the loan subject to a minimum tenure. For instance, an insurance company disburses a loan subject to a minimum tenure of six months. In this case, the loan must be active for the six-month tenure and shouldn’t be repaid. Thus even if you have the repayment capability, you are unable to make the payments.
  
  
• Reduction of Death Claim - Owing to uncertainties, adversities can set during the policy tenure and before the payment of the loan. During such times, the recovery of dues takes place from the claim amount. Hence your nominees do not receive the entire death benefits. This could adversely affect the financial corpus planned for the security of your loved ones.

   

Personal Loan and Life Insurance Policy
 

Personal loans and life insurance policy loans both are useful during the times of cash constraints. However, it is important to evaluate the two simultaneously to make an informed decision. As known, the policy loan is a percentage of the surrender value, and hence may be less than the amount that can be availed as a personal loan. Though personal loans may have a larger offering in terms of the loan value, it also has a bearing on your credit score. On the other hand, policy loans do not impact credit score ratings. 
 

To Conclude
 

A life insurance policy is a flexible financial instrument. It can offer financial funding during times of needs. Having said this, the primary objective of an insurance policy is to financially protect your family in your absence. Hence you must exercise due caution while availing any loan facility in future. Your debt obligation shouldn’t impact the financial security of your family.

L&C/Advt/2023/Feb/0696