In these times of online shopping festivals and abundant choices, many people live off loans and credit cards. But, the need for a loan is not always a lifestyle imperative. Sometimes, unfortunate circumstances create an immediate requirement for money, a need that can spoil the best laid financial plans. Generally, whenever someone finds oneself in a short-term financial crisis or needs money for meeting any kind of personal need or emergency, one looks towards personal loans or a bank overdraft or a loan against assets such as gold and land.
While such loans help one fund any personal expense and may have their own advantages, they come at high interest rates. They also need a good credit score, among others for getting approved. Besides, their repayment period remains very short – usually 1 to 5 years – which deters many people from taking a personal loan, particularly if the amount is big. Thankfully, there are some better alternatives to turn to, one being ‘loan against life insurance policy’. The country’s largest insurer LIC, for instance, offers the facility of loans against several policies.
What is loan against life insurance policy?
The primary purpose of life insurance is to provide financial protection to the dependents of the policyholder. However, it is little known that in times of crisis, a loan can also be taken against a life insurance policy, which, apart from being convenient is less costly than a personal or credit card or bank loan. True, all life insurance policies (like term insurance plans) are not eligible for loans. However, a loan can easily be taken against a number of other insurance policies like money back and endowment plans. Some ULIPs also qualify for loans. Thus, if you have an endowment plan or money back policy from a reputed insurer like LIC, you can opt for a loan against it.
Benefits of loan against life insurance policy
Since life insurance policies are taken for protection purposes, many people avoid taking a loan against them. They also wrongly think that insurance policies do not provide liquidity and that they lock up money for a long period of time. However, that is not correct.
It can be a wise move to take a loan against an insurance policy. Loans against life insurance policies are cheaper compared to personal loans. For example, while banks and NBFCs charge between 11% and 24% for personal loans, depending on the relationship and credit profile of the borrower, a loan against an insurance policy attracts a rate of interest as low as 9%. LIC, for instance, currently charges 9% to 9.5% interest for a loan against its policies. With a policy that yields around 7%, the real cost of this loan can be just 2%.
Another benefit of taking a loan against an insurance policy is that as against the limited repayment period of 1 to 5 years in case of a personal loan, you have the full tenure to pay back the life insurance loan. For example, if the policy term is 20 years and you are opting for a loan after 5 years of taking the policy, then you have 15 years to pay it back, till the policy matures. Thus, you will have enough time to repay the loan. Also, there is no compulsion to pay both the principal amount and interest together, as in the case of a personal loan. You can keep paying either the interest or both, as per your convenience. Besides, you also need to pay the premium on time.
Thirdly, apart from a good credit score, many documents are required in case of a personal loan, like salary slip, residence proof, PAN card details, etc. That is, however, not the case with a loan against a policy. Besides filling up and signing some documents, you just need to submit the original policy document to the lender.
Loan a better option than surrendering a policy
Some people also prefer to surrender their policies in case they face a short-term financial crisis. However, according to financial experts, taking a loan against insurance policies is a far better option than surrendering one’s policies. That is because while you will lose your insurance cover by surrendering a policy, the cover continues and the policy remains in force in case of a loan, provided you don’t default on the payment of premium. Also, there is no risk of being denied a policy a few years down the line if one reapplies after surrendering the earlier policy. Terms and Conditions for a loan
There is usually a waiting period of 3 years for someone to be eligible for taking a loan against a life insurance policy, and there mustn’t be any default on the premium payment during this period. Your policy must also belong to the category of insurance policies eligible for a loan. But in case of some of its policies (Iike Jeevan Shanti), LIC gives loans even after completion of one policy year, while in case of its Jeevan Shiromani policy, a loan can be availed after 3 months only.
How much loan you can take?
The loan amount depends on the surrender value of a policy, which can be up to 80-90% in case of traditional insurance plans with guaranteed returns. It can also vary from lender to lender. For instance, HDFC Bank provides loans up to 80% of the surrender value of the LIC policy being pledged with them, while LIC gives loans up to 90% of the surrender value of its policies, including cash value of bonus. For instance, if the surrender value of a policy is Rs 6 lakh, then you can get a loan of Rs 4.8 lakh to Rs 5.4 lakh.
Another important point to be noted is that one can take this loan as many times as one wishes, provided one is consistent with repayment and is eligible for an additional loan. Also, LIC offers a larger loan compared to other lenders.
Procedure for taking a loan
Once the surrender value of a policy is determined and the loan amount is approved, then you need to submit the original policy document to the lender you are taking the loan from, which will act as collateral. You also need to sign a deed of assignment, through which the benefits of the insurance policy get assigned to the lender during the tenure of the loan. In such a case the nomination on the policy will turn null and void. However, if the loan is taken from LIC itself, then there is no need for reassignment of a policy.
When the policy matures, the lender adjusts the remaining balance of the loan amount with the total claim settlement, and the balance is paid to the policyholder.
The good thing is that you can do all this online. The required documents can be uploaded online, and a physical copy can thereafter be submitted at any branch, there is no need to go to a home branch.
It is clear, thus, that apart from being your best friend in case something untoward happens to you, your life insurance policy can also help you tide over a short-term financial crisis. And you don’t have to look towards your relatives and friends for any financial help. So, stay healthy, secure and safe!
(This article is sponsored by LIC of India)