How to Get a Loan Against a Life Insurance Policy?

A life insurance policy acts as a financial safety net for the policyholder's family in the face of an unfortunate event. However, the benefits of a life insurance policy are not limited to this feature only. It also provides tax benefits, saving options, regular income after the retirement of the life assured etc. 

The provision of a loan grant is one such benefit of a life insurance policy that can be used by the life assured in a financially troubling situation. Besides providing a hassle-free loan process, the interest rate is much lower than the rate on traditional types of loans. Read on to know how to get a loan against a life insurance policy in detail.

How to Get a Loan Against a Life Insurance Policy?

Here are some factors that must be considered before taking a loan against a life insurance policy.

1. Check If The Policy is Eligible for a Loan

As not all life insurance policies provide the benefit of getting a loan, you have to check if your policy is eligible or not. Endowment policy, unit-linked insurance policy (ULIPs), and money-back policies provide such provisions against the policy's surrender value if the life assured had paid his/her premium within due dates for at least 3 years. On the other hand, term insurance policies that do not have surrender value cannot be used to take a loan.

You may also like to read:- What Are Term Insurance Riders And What Are Its Benefits?

2. Evaluate the Amount of Loan and Interest Rate

The terms and conditions of the policy ascertain the amount of loan that can be availed. The loan is generally given against the policy's surrender value; however, in the case of a ULIP, the loan can be issued against the current market value of the policy. The insurer only offers up to 80-90% of the policy for life assured to borrow. Moreover, the amount and number of premiums paid decide the interest rate. Here, a higher number of premiums equals a lower interest rate. 

3. Arrange Required Documents

Although the life assured should contact the insurance provider to ask for the document requirements for getting a loan; generally, a loan application form, the original life insurance policy document, identity and address proof, and an assignment deed that allows the benefits of the policy to the lender are sufficient. 

4. Apply for the Loan Against the Policy

The rights on the policy are assigned to the lender through the loan application against the life insurance policy. A processing fee and an interest rate are charged by the bank when the loan gets sanctioned after 2-3 days of the application. However, this time duration may vary depending upon the life insurance company. Until the loan repayment, the policy remains with the lender, after which he/she reassigns it to the insurance company.

What Happens When the Loan is Not Repaid?

It is essential to repay the loan within the assigned duration; however, if the life assured fails to do so, the loan will increase as the unpaid amount will be added to the principal due to the compounding effect. Moreover, if the life assured dies before loan repayment, the beneficiaries will get a reduced death benefit with the due amount and interest rate cut. Furthermore, if the interest and premium rate becomes equal to the surrender value, the policy will be terminated, and the life assured would lose the life coverage.

Also Read:- Best 5 SBI Life Insurance Plans in India 

Takeaway

The provision offers an excellent opportunity to get a high loan amount against a life insurance policy at a low interest rate. It is advisable to read all the terms and conditions and calculate the loan amount and interest rate beforehand. You can consult a financial advisor or an insurance agent to make a more informed decision.