Life insurance has always been considered an asset in terms of the aim and objectives of the financial planning of an individual. Life protection and wealth creation have been the main reasons for the popularity of suitable life insurance products in the country. Has it ever occurred that the same asset - Life Insurance Policy can also be banked upon for bailing out the individual in times of extreme financial crisis? Yes, it is eminently possible, if a loan against the Life Insurance Policy at an affordable interest rate is taken to overcome the imminent emergency.
The first question to answer while contemplating a loan by pledging a Life Insurance Policy is how it is going to be different from the other avenues of the loan in the market. A loan against a Life Insurance Policy is readily granted as it acts as collateral security. The benefits are not confined to it only - liberal loan amount, reasonable interest rate, lenient eligibility norms, quick processing, and disbursal are enough reasons to opt for it. The best part is, that even though the Life Insurance Policy document is pledged as security, it does not dilute the life risk cover of the policyholder,
While opting for a loan, let alone against Life Insurance Policy, the immediate concern apart from the quantum of loan, is the applicable interest rate. It has a direct bearing on the borrowed amount's cost by determining the size of EMI to be paid. It will impact the servicing of the loan and liquidation in due time comfortably without default. However, in the normal course, the rate of interest applied in loan against Life Insurance Policy is extremely affordable in the range of 10% to 12% per annum. It is prudent to check the applicable rate with the chosen lender.
The primary determinant for the applicable rate of interest is the conduct of the Life Insurance Policy. The basis lies in the number of premiums paid and its duration. A longer period of premium payment is a sure indicator of good creditworthiness, attracting a lower interest rate. A good credit score is another factor that lenders consider to have their evaluation process.
It differs from lender to lender, but the primary requirement rests on the policy's cash value, which is also termed the surrender value. Surrender value is determined by the amount the policyholder would receive from the insurer in case the policy is discontinued as of date, before the policy term expiry.
Lenders normally stick to 80 to 90% of the surrender value for the loan amount, subject to their cap amount.
One must know the types of loans granted against Life Insurance Policy. Lenders provide two types of loans with collateral of Life Insurance Policy.
The loan amount is disbursed in a single transaction to be repaid in a fixed time frame, which is defined as the loan term from which it assumes the name. The interest is charged on the full amount initially, subsequently on the reducing balance as the EMI gets paid into the account every month.
In this case, there is a drawing limit up to which the policyholder is free to draw money, as and when required. The repayment is continuous as convenient to the borrower. The applicable interest is charged on the used credit amount and for the period of usage. Some lenders refer to this type of loan as Flexiloan due is nature.
The application process for the loan across all lenders is simple. The primary requisite is to visit the nearest branch of the lender along with the original policy document and other supporting documents sought by them. The proposal form is filled up, and after requisite processing, verification, and documentation at the lender's office, the loan is sanctioned and disbursed to the credit of the policyholder’s account. Some new age Fintech companies offer an online application process, which is hassle-free.
Lenders offer relaxed and liberal documentation for Loans against Life Insurance Policy. The primary document required for the loan is the Policy Document in original, duly assigned in their favour for the tenure of the loan. It is their responsibility to ascertain the surrender value of the policy from the insurer, which provides the Surrender Value Certificate. On its receipt, the lender completes the other elements of the process, including lender specific documents. The policyholder is needed to furnish the KYC documents like ID proof, residence proof, and a photograph.
Most traditional banks offer loans to the policyholder against Life Insurance Policy, more so as it is fully secured. These loans are characterized by ease, meagre documentation, and speed of processing. Further, these loans are not charged for foreclosure or pre-payment and are convenient to the policyholder to liquidate as soon as possible. It is to check up some of the lenders for academic interest, as the features are likely to be similar across all lenders.
One of the leading private banks in the country, Axis Bank, provides Loans against Life Insurance Policy in the form of an overdraft facility. With liberal features, the maximum loan disbursed by them is 85% of the surrender value of the Life Insurance Policy.
Loan against Life Insurance Policy in this bank is also an overdraft, with an initial tenure of 12 months, subject to further renewal if desired by the policyholder. The maximum quantum of loan is 90% of the surrender value.
One of the top Private Banks, provide a Loan against Life Insurance Policy to any policyholder in the age range of 21 and 75 years. In an overdraft facility, the loan amount range is also large from Rs.50000 to Rs.5 Crore.
Loan against Life Insurance Policy in the bank is an overdraft for an initial tenor of 12 months. The minimum loan amount is Rs.2 lakhs, and the maximum is restricted to 80% of the surrender value of the assigned Life Insurance Policy.
One of the leading Fintech companies in the country, their Loan against Life Insurance Policy is an overdraft depending on the overall surrender value of the Life Insurance Policy. The minimum amount for eligibility is Rs.10 Lakh, and one must be over 21 years of age.
A1. No, as they do not have any cash value or surrender value, they are assigned to it.
A2. Usually, only traditional Life Insurance policies are considered for a loan. This includes ULIP also.
A3. Since ULIP is an investment life insurance plan, the eligible quantum of loan is ascertained by the current asset value of the policy, and the type of Fund.
A4. Generally, no lender levies any pre-payment or foreclosure charges against this loan.
A5. Yes, the regular premium has to be paid to keep the policy in force. Otherwise, the outstanding loan amount is liable to be squared off against the policy's surrender proceeds as it is discontinued.
A6. There is a minimum waiting period of a minimum of three years before the insurance policy can be pledged for the loan.
A7. Yes, some of the lenders like LIC routinely provide Loan against Life Insurance Policy to their policyholders.