Should we opt for a loan against a life insurance contract?
Rakesh Goyal, director, Probus Insurance brokers, said there are some advantages to taking out a loan against your insurance policy, such as lower interest rates and the ease of getting a loan.
Here are the main advantages and disadvantages of taking out a loan against your insurance policy.
A. Benefits of taking out a loan against life insurance
1. You get a high loan value
The maximum loan you can get against your insurance policy varies from insurance company to insurance company. Typically, however, policyholders can obtain loans equal to 80% to 90% of the cash value of the policy.
The cash value is the policy value you get when you voluntarily terminate the insurance plan. Goyal said: “If you have insurance coverage of Rs 50 lakh and its cash value is Rs 20 lakh (at the time of applying for the loan), you (the policyholder) are likely to get a loan of around Rs 18-19 lakh. ”
2. You can get a low interest rate
The interest rates charged by insurance companies on loans taken out on their life insurance policies are generally lower than those charged on personal loans. Akshay Vaidya, Head of Life Insurance, Policybazaar.com said that the interest charged on the loan taken on a life insurance policy depends on the premium already paid and the number of times the premium is paid. The higher the premium paid and the number of times, the lower the interest rate will be. “Since there is wealth coming from the life insurance policy as collateral, the rate will be lower than that of an unsecured loan,” he said.
“Currently, a personal loan carries an interest rate of 12 to 15%. While in the case of a loan against life insurance, the interest rate charged depends on the insurance company, but it is generally lower than that charged on personal loans. By the past trend, interest rates on loans against insurance policies can be between 10 and 12 percent, ”Goyal said.
3. Quick availability of the loan
When it comes to getting quick loans with minimal paperwork, loan versus life insurance ranks against other types of loan. “Unlike other loans, there is no long and cumbersome loan application process for an insurance policy. Loans can be obtained within days with minimal delays. Generally, policyholders can get loans. get loans within 3-5 days of application, ”Goyal said. mentionned.
4. Loans are secured and require limited review
The life insurance contract is given as a guarantee for the repayment of the loan in the event of default. Hence, you get lower interest rates. Since the loan is secured, the review is limited and the loan can be disbursed quickly. In other cases, lenders typically assess your credit scores and charge you interest rates for a loan based on the score.
B. Disadvantages of taking out a loan against an insurance policy
1. You may get a lower loan amount in the early years of insurance
It is widely believed that such a loan can be taken against the insured sum of the policy. However, this is not true, your loan is only penalized on the cash value of the policy. Since a policyholder can take years to build up a significant cash value / cash value under their life insurance policy, the loan they can take against the policy may be limited over the years. first years of the police.
Gaurav Gupta, Founder and CEO of MyLoanCare, said: “You must first check with your insurer whether or not your policy is eligible for a loan. Although the maximum loan amount you can get is about 85-90% of the cash value of the policy, if you take out a loan in the first year, the loan amount used will be considerably small because it will take you years to build up a significant cash value under its life insurance policy.
2. Not getting a loan on all types of life insurance
A loan can only be taken out against traditional life insurance policies and not against a term plan. Traditional plans include endowment policies, repayment plans, whole life, etc. where the return is guaranteed.
Goyal said: “The term life insurance policy is not eligible for taking out loans. It should be a traditional plan or an endowment plan. However, several insurance companies do grant loans. loans against unit-linked insurance plans. ”
3. There is a waiting period
You will not be eligible for a loan under your life insurance plan once you purchase it. There is a waiting period of about three years. The lender basically checks to see if you’ve paid the premium or if you’ve defaulted during the three-year waiting period. As a result, the loan is sanctioned on the basis of the cash value.
4. Default of loan repayment
In the event of default on loan repayment or default on payment of future premiums, the insurance policy lapses. The policyholder must pay interest on the loan taken against the policy as well as premiums on the policy. The insurance company also has the right to recover the principal and interest due on the cash value of the policy.
Gupta said: “A deed is signed in which the benefits of the insurance policy against which the loan is used are attributed to the lender or the insurance company.”
What should policyholders do
The purpose of purchasing life insurance is to ensure the financial security of our loved one in the event of an unfortunate death. However, in an emergency if you want to take out a loan against life insurance, it should only be used sparingly for short periods of time or when the borrower is not able to borrow another type. loan.
As Gupta put it, “When you take out a loan against a life insurance policy, the policy is assigned to the lender who may reserve the right to deduct the loan and the unpaid interest in the event of the death of the policyholder. insurance. ”