You can avail loan against life insurance. This feature comes handy for life insurance policyholders, as they can borrow by pledging their life insurance plans. These life insurance policies not only shield the policyholder against risk, they also help them avail a loan in times of cash crunch at lower interest rates vis-à-vis personal loans. Many people pledge endowment life plans and meet emergency needs.
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Type of Policies: All life insurance plans do not offer loan against life insurance. Various types of life insurance policies come with varied terms like endowment plans and unit-linked insurance plans or ULIPs, which offer loan against life insurance. Term plans are not eligible for loan facility as they do not have any surrender value.
CIBIL Score: Loan against life insurance policy is a type of secured loan. So, banks do run a CIBIL check before disbursing the loan against life insurance plan. This type of loan is suitable for borrowers with a low CIBIL score.
Loan Interest Rate: The interest rates for loan against life insurance are lower than unsecured loans like personal loans.
Documentation: Banks require minimum documentation for these types of loans. The loan is also disbursed quickly and directly transferred to the bank account of the borrower.
Loan Amount: The amount sanctioned by the bank depends on various factors like number of years premiums are paid, type of insurance policy and the tenure of the policy. A traditional life insurance policy allows the borrower to avail a loan up to 80% to 90% of the surrender value.
Tax Benefits: The interest amount on loan against life insurance is eligible for a tax deduction. The tax deduction can only be availed if the loan money is used for home construction, repair or home reconstruction.
Repayment Option: Loan repayment is done in monthly EMIs, where the borrower must pay the principal amount along with the interest. The policy lapses in case the policyholder is unable to repay the loan. The borrower has the option to pre-pay the loan, however it is always advisable to pay the loan on time.
In case of loan default, the outstanding amount increases and the policy lapses, if the premium amount and interest becomes equal to the surrender value. In case of death of the policyholder, the loan amount is deducted from the sum assured offered as death benefit.
See Also: Money Back Life Insurance Policy
Premiums: The borrower must pay the life insurance policy premiums regularly, even after availing loan against life insurance policy. The policy is terminated if the policyholder misses premium payments.
Surrender Value: The surrender value is the amount the policyholder receives, while exiting the policy before maturity. A normal life insurance policy reaches surrender value after 2-3 years of continuous premium payment. So, a policyholder can apply for a loan against life insurance, after this period.
Charges: The borrower must pay nominal processing fees.
Deed of Assignment: The deed of assignment must be in favor of the insurer and executed by the policyholder, while availing a loan against the policy in the prescribed format.
Borrowers can avail loan against insurance policies from their banks, by pledging plans as collateral. The loan amount depends on certain factors like the type of life insurance policy and the insurer.
The borrower must collect all the necessary details pertaining to the terms and conditions of the policy from the insurance company, before applying for a loan against the insurance.
The borrower must submit certain mandatory documents for getting the loan against life insurance sanctioned. They are
Once the bank verifies the documents, the application is approved. After this, the loan is disbursed directly to the bank account of the borrower, which must be repaid in monthly EMIs.
See Also: How Much Life Insurance Do I Need?
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