Generally it is a common concept among people that insurance policies provide protective cover to the policy holder. If any uncertain or untimely demise happens to the person the assured sum in insurance policy is given to the nominee. Apart from ensuring life-cover, loans can also be received against these life insurance policies from various banks and non-banking financial institutions as well as insurance companies. Loans against insurance policy charge lower rate of interest of 10%-11% in comparison to 15%-25% rate of interest of any other kind of loans. This loan can be availed only for insurance policy, not against Term insurance which does not have assured sum or Unit Linked Insurance Policy which is linked to the market.
Loans against Insurance policy
The person applying for loan against insurance policy must fulfill the following conditions.
- Must be individual, resident of India as NRIs are not eligible.
- Must have paid regular premiums for at least last 3 years when the individual is applying for the loan. In other words, the life insurance policy should cross the lock-in-period- of 3 years.
- Every insurance policy has a surrender value. You are eligible for loan on the surrender value of the policy. This surrender value is calculated on the total sum of the premiums you have paid.
- Loan can be received on endowment policy or money back policy. Loan is not sanctioned against term plan policy or Unit linked insurance policy.
The following documents are needed while you apply for Loans against insurance policy.
- Original insurance policy.
- Deed of assignment which states that the benefits of the policy that the policy holder is assigned to the respective banks or NBFCs from where he has received the loan amount.
- A cancelled cheque of your bank account in which the loan amount is to be credited.
It is a complex calculation how much amount you may get as loans against your life insurance policy. The loan amount is calculated on the basis of surrender value of the insurance policy, no. of premiums paid, no. of years completed etc. But normally it is calculated in two ways. The first one is on the basis of surrender value of the insurance policy and the second one is on the basis of accumulated money you have paid via regular premiums for the policy. Let’s illustrate them with examples,
Suppose, you have taken an insurance policy which has an insurance coverage of Rs. 20 Lakh and you pay regular premium of Rs. 50,000/-on yearly basis. Generally the surrender value of the life insurance policy is 30% of the sum assured. It means your policy has the surrender value of 30% of Rs. 20 Lakh = Rs. 6 Lakh. So you are eligible to get maximum 90% of Rs. 6 Lakh = Rs. 5.4 Lakh and you can get loan of Rs. 5.4 Lakh against your life insurance policy.
In the case of second calculation, let’s assume you have taken an insurance policy which has an insurance coverage of Rs. 20 lakh. When you apply for loan against this policy, you have already paid a total premium of Rs. 5 Lakh. Normally it is a thumb rule that you can get maximum loan amounting to 50% of the sum of the premium you have paid in an insurance policy. As you have paid total of Rs. 5 Lakh as premium, you are eligible to get a maximum loan of 50% of 5 Lakh = Rs. 2.5 Lakh.
- Read also: Did You Know You Can Avail A Loan Against Your Insurance Policy?
- Read also: Loan Against Insurance Policy, Eligibility, Interest Rate
Rate of Interest
Rate of interest varies from banks to banks or the insurance companies. The current rate of interest is 10%-12%.
Repayment of Loan
The loan amount is to be paid off within 6 months to one year from the date when the loan amount is credited. The policy has two choices for repayment. You can pay back the principal amount along with the interest on monthly or quarterly basis. Again you can pay off the interest only and if you wish the principal amount will be deducted later from the assured amount of the policy at its maturity.
In case of sudden demise of the policy holder, the loan amount is deducted from the assured amount of the policy. Then the rest is transferred to the nominee’s account.
The benefits of loans against insurance policy
- This kind of loan attracts cheaper interest rate of 11% in comparison to the personal loan which charges rate of interest between 15%and 17%.
- Faster availability of loan against insurance policy and the loan is sanctioned within one week where other personal loans are time consuming.
The bottom line is since insurance policies provides financial securities to dependents for any unforeseen situation like health hazards, deaths, loose of efficiency caused by accident you need to consider loans against insurance policy as the last option to choose and take note the loan should be repaid within maximum one year.
- Read also: 6 ways to get a Loan Quickly with Affordable Interest rate
- Read also: How to manage Emergency Fund Step by Step
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