Can I Avail Loans With Life Insurance Policies?

There are times in life when a financial emergency catches us on the wrong foot. We are left facing a financial shortage and find ourselves scrambling for money. It could be due to any number of reasons. Perhaps it’s a sudden surgery that needs to be paid for, or exorbitantly high college fees, or the down payment for a property purchase. Whatever the reason, the need for emergency cash is acute. What happens if you are unable to secure the funds needed? Your life insurance policy may just be your saving grace!

Life Insurance Policies and Loans

Your life insurance acts as your protective coverage. Your policy is an agreement with the insurance company to provide financial benefits to your beneficiary if you pass away during the agreed-upon period, which is the coverage period. This particular type of monetary benefit is called the Death Benefit. Life insurance policies may offer other additional types of financial benefits. For example, insurers may offer a Maturity Benefit in case you survive the coverage period. 

Other than these financial benefits, life insurance has become even more multifaceted. Today, you can get a loan against your life insurance policy, subject to a few basic terms and conditions. So you get the double benefit of life coverage as well as an additional financial benefit in the form of an easy loan facility.

An example

Akash was making arrangements for his son’s wedding. The venue was booked, trousseau bought, and all the other myriad arrangements were ready. Or so he thought. A month before the wedding date, the venue he originally booked suddenly closed down due to extensive emergency renovations. Luckily, he got back his full deposit. Unluckily, however, it was already the height of the wedding season in India and his options were fewer than before. Akash settled on another venue soon enough. However, due to the high demand, last-minute arrangements, as well as a more premium location, he needed to pay a much higher deposit.

Akash had already spent most of his savings on making lavish wedding arrangements. He had already availed a personal loan to supplement his shortfall. Now once again, he was facing a financial shortage. What could he do? He did not want to take another personal loan or increase the loan amount as the interest was very high. He was informed about the facility of getting a loan against a life insurance policy. He approached his insurer and sure enough, his loan was sanctioned without any delay or hassle. And without a high rate of interest either! 

Akash credits his life insurance policy for helping him make his son’s wedding a resounding success. 

Benefits of Taking a Loan Against Life Insurance

There are several benefits of taking a loan against life insurance as opposed to taking a personal loan or a loan against gold or property. Here are some of the benefits:

1. High Loan Values
   Banks and non-banking financial companies will look at various factors before issuing a loan. Some of the factors are your monthly or annual income, your credit score, credit history, and so on. In contrast, your insurance company will go about setting your loan amount in a totally different way. As a policyholder, your loan amount will be equal to 80–90% of your policy’s surrender value. This surrender value is the value of the policy that the policyholder receives when they voluntarily terminate their policy. Suppose you have life insurance coverage worth Rs 1 crore, its surrender value might be 70 lakhs. Then the loan amount you may get will be around 50–60 lakhs. In this way, you have a high probability of getting a high loan amount by taking a loan against your life insurance policy. In contrast, a personal loan from a bank might give you only a fraction of the same amount. A point to note is that the maximum amount that you get from life insurance differs from company to company.
2. Low-interest Rates
   Personal loan interest rates usually start from 12% and can go as high as 15–18%. So though personal loans are marketed as easy finance, the EMIs can add up! In general, insurance companies charge lower rates of interest than those charged on personal loans. The interest rate that your insurer charges you may depend on factors such as the premium you have paid as well as the number of times you have paid the premium.
3. Constant Value
   Unlike other loans such as a loan against gold, the value of your policy does not change as per market rates and conditions.

Secured Loans with Limited Scrutiny

Unsecured loans such as personal loans have higher interest rates as the lenders are taking a risk by issuing the loan without collateral. Thus, they tend to have higher interest rates. Here the loan is issued to you against your life insurance policy which acts as collateral. This also is the reason for the lower interest rates. Moreover, unlike other secured loans, the paperwork and scrutiny involved are limited. You will need to provide your insurer with basic KYC documentation such as ID proof, address proof, a passport-sized photograph, and so on.

1. Hassle-free
   Your life insurance policy acts as collateral for the loan so you do not have to provide collateral in the form of gold, property, or any other assets. This cuts down on the hassle and stress of providing the collateral, having it assessed, and so on.
2. Easy Eligibility
   These loans have very simplified eligibility criteria. You should be a salaried or self-employed citizen of India above the age of 19–21 years, depending on the insurer. This is unlike other secured loans, where the eligibility criteria can be stricter.
3. Speedy Availability
   Since this loan comes with easy eligibility and minimum documentation, the entire loan disbursement process is expedited. So, you can get a loan with minimum delay and in a matter of 3–5 days.

Things to Remember When Availing of a Loan Against Life Insurance

Here are some conditions to keep in mind when you want to avail a loan against your life insurance policy:

• Waiting Period - Do not assume that you will be able to avail of a loan as soon as you purchase a life insurance policy. There is a waiting period for all loans against life insurance plans. This waiting period is usually three years from the date of purchase of the life insurance policy.
• Premium Checks- When assessing if you are eligible for the loan, the insurer will check if your premium payments are up-to-date. You should not have defaulted during the waiting period. Only then will the loan be sanctioned as per the surrender value.
• Not Available on all Insurance Types -Term insurance plans are pure life insurance policies. They are popular as they are much more affordable than all other life insurance types. However, term insurance is not available on term insurance policies. To get a loan against life insurance, you must have a traditional or endowment policy. Nowadays, you may also get a loan against unit-linked insurance plans.
• Lower Loan Amount in Initial Years -There is a misconception that the loan against the life insurance policy is issued against the sum assured amount of the plan. But this is wrong. The loan amount is issued against the surrender value of the policy. And so, it can take you years to accumulate a noteworthy surrender value amount. Hence, if you want to avail of a loan in the initial years of your policy, you may find it a lower amount than you expected. The more time that passes in your life insurance coverage, the more likely your loan amount will be high.
• The Danger of Defaults -If you default on your loan repayment or in paying the future premiums of your policy, your insurance policy could lapse. It is imperative that you repay the interest on your loan amount as well as all premiums. If you do not, your insurer can recover the principal and interest from the surrender value of your insurance policy. If your loan debt exceeds the surrender value of your insurance policy, your insurer may terminate your policy.
• Loan Maturity and Repayment - If your insurance policy matures before you repay the entire debt, then the life insurance company may deduct the outstanding amount from the Maturity Benefit before paying it to you.
• Death of the Policyholder and Loan Repayment -If the policyholder passes away before the loan is repaid in full, the insurer will deduct the outstanding amount from the Death Benefit before paying it to the beneficiary.

Summing Up

Any life insurance policy intends to insure the financial security and protection of our loved ones in case of our unfortunate demise. To this end, you should avail of a loan against your life insurance policy only when urgently required or for short-term periods. You do not want a situation where either the Maturity Benefit or Death Benefit is compromised because of non-repayment. So, while you can avail of a loan against your life insurance policy, be prudent when choosing this option.