Loan Against Insurance Policy

Loan Against an Insurance Policy

It is common knowledge that banks and NBFCs often require a form of collateral against which they are willing to lend to individuals. Various forms of collateral can be used to avail of a loan and one such form of collateral is an insurance policy. In actuality, an insurance policy is a protective cover that accounts for financial losses owing to various unforeseeable reasons. However, insurance policies can prove to be useful investments owing to the fact that their monetary value can be utilized in the form of a loan against an insurance policy. The most common form of insurance policies used as collateral to avail of loans is life insurance policies with lifetime cover and guaranteed returns. This article aims to present all the facts pertaining to loans against insurance policies. Read further to know more.

Policy Eligibility for Loans

Not all insurance policies can be used as collateral to acquire a loan. It is important to communicate with your insurer about your eligibility for a loan using your insurance policy as collateral. It is important to note that only policies that offer life cover are accepted by banks and NBFCs as collateral. Term plans are generally not valid collateral for loans as they do not boast of cash value and are lacking a savings element.

Loan Amount

As with any other secured loan, the loan amount that can be availed of when borrowing against an insurance policy is dictated by the collateral offered. In this case, the loan amount is often equivalent to 85% to 90% of the surrender value of the policy. This fact mainly pertains to insurance policies with guaranteed returns. However, if your insurer does provide loan benefits on unit-linked insurance schemes, the loan amount is fixed by the lender keeping in mind the current value of the policy holding and the kind of insurance policy being offered up as collateral.

Rate of Interest

As with any other loans, loans against insurance policies need to be repaid overtime inclusive of interest charged by the lender. The advantage for the borrower here is that secured loans often attract lower interest rates as the lender enjoys repayment security and a debt collection advantage. This is primarily why loans against insurance policies come with a rate of interest that varies between 10% to 14%. It must be noted that interest is calculated on the basis of premiums paid and the premium amount. When the premium amount is high and a significant number of premiums have been paid, the interest charged on a loan against an insurance policy is comparatively lower than when an individual pays a lower premium amount and is yet to pay off a significant number of premiums.

Documentation Required

As a loan against an insurance policy can only be availed by the policyholder, the borrower must provide sufficient proof as documentation. This includes...

• ID Proofs
• Address Proof
• Income Proof
• Policy Papers

To conclude, it is important to note that loans against insurance policies are advantageous when compared to personal loans that attract higher interest rates. Even then, these loans can be used by borrowers in the same ways that personal loans are utilized.