Loan against life insurance policy

If you are in urgent need of cash, you can pledge your insurance policy as a collateral with a bank or avail a loan from the insurance company itself. Now, let us find out how a loan against insurance policy works.

Loan against insurance policy is available against endowment policies, money-back policies, among others, but Unit Linked Insurance Policies (ULIPs) and term insurance policies may not be eligible for loan. Hence, at the outset, one needs to ascertain whether or not your insurance policy is eligible for availing loan facility.

After confirming the eligibility, the amount of loan available against the policy needs to be ascertained. The loan amount depends on the surrender value of the policy, number of premiums paid and the number of completed years of the policy period. The surrender value is the current value of the policy if it is terminated voluntarily by the policyholder. Hence, the more the policy premiums paid and more the number of years the policy remains in force, the higher the surrender value and higher the loan amount available against the policy. The bank or the insurance company may provide loan amount equal to 80-90% of the surrender value of the policy. For example, if the insurance cover on the policy is Rs 10 lakh and the surrender value is Rs 4 lakh, the loan amount could be Rs 3.20 lakh to Rs 3.60 lakh.

The eligibility for availing loan against insurance policy is contingent upon the insurance policy being in force for a period of at least three years. In other words, the policyholder should have paid premiums for at least three years to be eligible for loan against insurance policy.

After availing the loan, the policyholder has to continue paying premiums towards the policy, as default in payment of premium may lead to termination of the policy by the insurance company. In the event of default in repayment of loan, the insurance company may terminate the policy and recover the outstanding loan amount from the surrender value. If the loan is availed from a bank and the policyholder defaults in repayment of loan, the bank may request the insurance company to terminate the insurance policy and recover the outstanding loan amount from the surrender value of the policy.

The bank or the insurance company may not charge any processing fee on loan against insurance policy or may charge a very nominal processing fee. Moreover, the interest charged on loan against insurance policy is lower than personal loan.

The duration of loan repayment depends on the balance tenure of the policy period, so for a 15-year policy where the policyholder has paid premiums for 5 years and the policy has been in force for 5 years, the loan repayment tenure will be 10 years. The policyholder also has two repayment options, one, he/she can repay both the principal amount and interest through EMI or he/she can pay only the interest amount on the loan and settle the principal amount from the surrender value or from the maturity amount of the policy.