Taking a Loan Against Insurance Policy in India

A loan against policy is something that offers great value and convenience as you don’t have to provide any other asset as collateral. If you opt for this mode of finance, you won’t have to search around too much, as pretty much every bank and NBFC (Non-Banking Financial Company) offers them. What’s more, the loan works out to be even cheaper than an unsecured loan like a personal loan. 

And yet, not a lot of people take advantage of this and lose valuable time, energy, and peace of mind worrying about the high EMIs of the various unsecured loans they take. 

The reason is, in one word, unawareness. Most people aren’t even aware of this loan and its great features, and the fact that it is available from pretty much any lender. 

If you’ve been a part of this crowd, fret not; this guide will help you understand all you need to know about taking a loan against your insurance policy. Reading through it, you’ll get to know how and whether you can apply for one, what documents you need, its advantages, and its disadvantages. 

What Exactly is a Loan Against Policy? 

Loans against life insurance policies are secured loans that are available from most lenders across India, both banks and NBFCs. You can even opt for an LIC loan against policy, where the loan is provided by the insurance agency itself. 

So long as your insurance policy has been in existence for a 3-year period, you can take a loan listing the policy as collateral. It’s as simple as that. 

Am I Eligible?

People with insurance of the following types can apply for the loan against insurance policy: life insurance plans and ULIPs (Unit Linked Insurance Plans). You probably know about life insurances. ULIPs are life insurances that provide risk cover with options to invest in areas like shares, stocks, and bonds. A great thing about loans against insurance policies is that these aren’t dependent on how much you earn; your income plays no role in this matter. However, keeping your credit score high is vital here.

Why didn’t I know about these?

Most insurance policyholders are simply unaware of the fact that such loans exist, and miss out on a loan that doesn’t even involve the pledging of other assets. Another reason for the lack of popularity of these loans in India is simply that not many people even have insurance policies.

How Much are Loans Against Policies worth?

The calculation of your loan amount depends on whether you have a traditional life insurance plan or a ULIP. Traditional plans can get you loans of up to 90% of their SV (Surrender Value); SV is the amount you get paid if you exit the plan before maturity. Basically, you get the greater of the guaranteed surrender value or the special surrender value. The guaranteed surrender value amounts to 30% of your insurance premium minus your initial premium amount. This is the minimum amount available as a loan. The maximum amount is 80-90% of the surrender value. Note that the pay-out depends finally upon the lender’s policy.

In the case of ULIPs, the loan amount depends upon the current value of the corpus (total amount invested). If more than 60% of your ULIPS assets are invested into equity, you can get 40% of the corpus as loan amount. If debts make up more than 60% of your assets, you’re eligible for a maximum loan amount of 40% the corpus value.

What are the Documents Required to Apply?

Obviously, the primary documentation you’ll need is the original insurance policy. This is the asset you’re presenting as collateral to the loan. The next item on the list is a deed of assignment. This is a document where you sign over the benefits of your life insurance policy to the bank, NBFC, or insurance company you’re taking the loan from. In other words, you transfer the title of the policy to the lender until you pay back the amount borrowed. Only you (as the legal policyholder) can execute this assignment and it has to be endorsed on the policy itself. Normally, the loan is paid out via NEFT; you’ll need a payment receipt for the loan amount. The last document you’ll need is a cancelled cheque. Usually, there’s a nominal fee of Rs.250.

What are the Repayment Options Available?

The tenure of your loan and the repayment options available vary according to the chosen lender. For example, insurance providers like LIC don’t even require you to pay back the principal. Banks and NBFCs provide you with a tabulated repayment schedule. Tenures can be for the remaining policy term. With traditional life insurance policies, you stand the risk of your policy lapsing if you don’t pay the premium as expected. Even when a lender is the technical title holder of the policy, it’s your responsibility to keep paying premiums. 

If you’re wondering about insurance companies and their “no principal required” schemes, it goes like this: when the policy reaches maturity, the outstanding principal simply gets deducted from your pay-out. Typically, LIC’s loans have a repayment period of more than 6 months. If you want to pay a lump sum and end the loan, you’d still have to pay interest owed over the original tenure. In the case of death of the policyholder, interest will only be charged up to the time when maturity was reached.

What are the Risks I need to Avoid?

When taking out a loan against your insurance policy, you’ll need to take care to avoid certain pitfalls. For instance, failing to pay back the instalments within the allotted time affects the policy’s benefits. When the policyholder passes away, the principal amount owed as well as the outstanding interest amounts get deducted from the policy pay-out. If you miss paying your interest amounts, the loan amount increases by compounding and the unpaid amount gets added to the principal. With insurance companies, the amount owed gets counted as interest against the surrender value of the policy. If and when the outstanding amount outweighs the surrender value, your policy will get terminated.

Are there Any other Benefits?

Yes. Getting a loan against policy gives you even more advantages than the ones discussed already. Let’s take a glance at some of these. 

● There’s no such thing as “too little” here; there’s no minimum cut-off for the loan amount 

● There’s almost no chance your loan application will get rejected, unlike unsecured loans that depend on income details and credit scores 

● Your CIBIL (Credit Information Bureau Limited) score remains unaffected by loans against policies; you can keep calm when applying for that home loan.

That’s about all you need to know about taking a loan against your insurance policies. These are a handy way to generate funds without having to pledge assets you’re currently in need of. These have flexible loan amounts, and applying is a breeze. If you have a more than 3-year-old policy and are in immediate need of funds, you know where to look now!