How to Take a Loan Against Your Life Insurance Policy

Taking a loan against an existing life insurance investment is common;however, the facility comes with specific terms. Not all life policies offer the option. Read on to know more.

Reasons why people need loans

Loans can be taken for various purposes, like when you need to make a costly purchase or if there is a financial emergency. However, getting a loan against your life policy is a good idea only if you need the money immediately. Such a loan can prove beneficial in the time of need, as it is easily available. What you must know is that these loans are offered only against life insurance products that come with a surrender value, like an endowment policy. This financing option is not available in case of a term insurance plan.

You can get a percentage of your policy’s surrender value as the loan. This ensures faster and easier processing of the loan application. After the approval of your loan request, you will need to pay the premium for your policy and interest for the loan. You must note that the lenders only accept the loan application if you had the life policy for at least three years. However, the true purpose of a life insurance plan is to provide financial security to your loved ones. Hence, it is wise taking a loan against your life policy only for a shorter duration loan in case of a financial urgency.

How to apply for loans using current life insurance policy as collateral

You can get the loan against your policy from either a bank or your insurer. To get the loan, you need to first find out if it is available for your existing policy and the amount that the lender can offer. Once you are sure, the loan application process can be initiated by assigning the life policy to the lender. They will retain the life insurance plan for the duration of the loan.

When filling the loan application, make sure to carefully provide details related to the life policy and the amount of loan required. Your application will be processed and approved within a few days; however, this period may vary depending on your lender. Along with the interest payment, the lender will also charge processing fees for the application. After you receive the funds, the lender will possess the life policy until the entire loan is repaid.

The commonly preferred documents for a loan against your life insurance plan include:

  • The deed of life policy assignment
  • The original life insurance policy document
  • A canceled cheque

Terms and conditions

  • Loan amount

The type of life policy you have and the remaining tenure determine the loan amount. For example, you can get up to 90% of the traditional life policy’s surrender value as a loan against it. However, for ULIPs, the loan amount relies on the current market valuation of the corpus. If investments made towards equity is over 70% of the total fund, a loan can be available for up to 40% of the entire corpus.

  • Interest rate

The rate of interest against the loan depends on how much premium you have already paid towards the existing life policy. The higher it is, the lower will be your payable interest rate.

  • Failure to repay the loan

If you cannot repay the loan on time, the life policy lapses. When the unpaid interest and premium equal the policy’s surrender value, you will lose the life insurance cover. If the loan remains unpaid due to an unfortunate event, the life policy benefit is paid only after subtracting the total outstanding amount, which includes the rate of interest.

Purchasing the right type of life insurance plan is vital to get a loan against it. Hence, be careful about it when investing in the policy. You can use a life insurance premium calculator to compare different products offered by various insurers. By doing this, you can also get a clear idea of the approximate life insurance quotesand make an informed decision.

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