For most of us, an insurance policy is taken for a dedicated purpose. For example, a life insurance policy which pays a promised amount to the insured’s nominee after demise. Hence, it is commonly assumed that you can avail the benefits of this policy whenever it matures or as per the terms of the policy.
However, some of the plans also offer loan against life insurance policy. If you need some amount of money matching the amount in the policy, you can avail a loan against the insurance policy.
Let’s see how this is possible.
How to Take a Loan Against Insurance Policy?
To avail a loan against an insurance policy, follow the below steps:
- Reach out to the insurance company’s office to understand the procedure of the loan.
- Then, visit the nearest branch or the branch from which you availed the policy.
- Submit your documents as already inquired over the call.
- You may have to offer a cancelled cheque to get the loan amount directly in your account. So, carry your cheque book with you.
In a few days, as per the rules and regulations of the insurance company, your loan amount will be credited to your account. This amount will be approximately 60-80% of your maturity benefit.
Repayment Options
Usually, you have two options for the repayment of the loan that you take against the life insurance policy.
- You can pay the principal amount as well the interest applied on loan within the tenure of the policy. This means that if your policy matures in the next 10 years, you need to pay this loan within 10 years or as decided with the provider.
- You can also pay only the interest of the loan, and when your policy matures, you can settle the principal amount.
Depending on your requirements, you can choose one of the two options. If you need a loan for a short-term, then there’s no need for paying the principal at the time of settlement. It will increase the interest amount that you need to pay.
On Which Insurance Plans, Can Loan Be Availed?
According to the recent guidelines by IRDA, it is not possible to acquire a loan against insurance policy for Unit Linked Insurance Plans. You can only take a loan on endowment plans, which is also a part of your surrender value acquired over a certain period of time.
Hence, it is suggested to read the documents of your policy before applying for a loan. Some insurance companies don’t offer loans on insurance plans, and others have too many formalities or rules. For a better experience, always go through the fine print of your policy.
Further, you have an additional option of keeping your policy as collateral. For instance, if you are taking a home loan, you can put your policy as collateral for the loan.
What is the Rate of Interest?
The loan against mutual fund interest rate or insurance policy loan interest rate is dependent on the insurance provider. So, you may have to check with your provider to understand the interest rate. If you have more than one life insurance plans, check with all the providers to acquire the lowest rates.
In general, if you have a higher premium amount paid, you will get low-interest rates.
Conclusion
loan against life insurance policy is an optimum way to reduce the sudden cash crunch that you may face. However, it is suggested only to take a loan on the insurance policy when it is necessary and urgent. These policies are meant to secure you in case of issues. So, it is best not to take out this money unless absolutely necessary.
