Loan against Insurance Policies

A loan against insurance policies is available to Life Insurance policyholders on the surrender value of the policy which is usually acquired after paying premiums for at least three years.  Surrender value (cash value) in an insurance policy refers to the amount of money an insurance company pays to the policyholder if they decide to terminate their policy before its maturity. The policy should also have a track record of timely premium payments. Loan is available only to those term insurance policies with a surrender benefit such as an endowment policy, Money-back plan, and Whole life policy. On the other hand policies like Term plans do not qualify for loans.

The loan amount is usually a percentage of the surrender value and can range from 80–90%. In the case of Unit Linked Insurance Plans (ULIP1), the loan amount depends on the market value of the corpus along with the fund type. However, some ULIPs are not qualified for availing loans. Hence it is important to check on the eligibility with your insurer.

Documents required: The loan applicant must submit the prescribed application form, along with the original policy document. Besides, the policy is assigned favouring the lender through a deed of assignment. An assignment is when the rights, title, and interest in debts due or accruing due to a person are transferred to another person. This makes the lender eligible to receive the policy benefits during the policy term. The borrower must continue to pay the remaining premiums as per the schedule

Interest Rate: Banks: Banks typically charge between 10% and 15% interest for a loan against an insurance policy based on the base rate. LIC charges around 10%. Other insurance companies also charge similar to LIC.

Repayment – The lender intimates the repayment schedule. It is typically spread across the policy period. You may opt to repay the principal amount and interest payments or make only the interest payments. In the latter case, the principal amount gets deducted from the claim at the time of settlement. Similarly, in case of the policyholder’s demise during the policy term, the nominees receive the net amounts post adjustment of the dues.

Defaults in the loan availed can result in the foreclosure of the policy to recover the dues. Hence it is important to ensure timely repayment of the obligations.