Life insurance policies are generally availed to insure self or family members against life risk. However, some insurance plans can prove to be a great help in case you are facing a cash shortage or need immediate funds. These loans come at a lower interest rate and better terms than bank loans. The best thing is insurers do not check your credit score for sanctioning such loans. Your policy acts as the security against your loan. If you fail to repay the borrowed amount your insurer has the authority to terminate your policy.
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Firstly you need to confirm whether your insurance policy is eligible for a loan or not. For example, term insurance policies do not qualify for loans as there is no maturity or surrender value on term plans. Term plans do not have any cash value and they simply expire at the end of the policy tenure.
Other life insurance plans like endowment plans, whole life insurance plans, and money-back plans qualify for loans provided you have paid the insurance premiums for at least 3 years. You will qualify for a loan only after a minimum of 3 years.
The amount of loan you can avail depends on the surrender value of your policy. The rate interest levied on the loan against the insurance also depends on the loan amount. The lender also takes into account the number of premiums already paid and for the number of years, it has been paid. You can avail of a better interest rate if you have already paid a considerable premium amount.
For example, LIC India is charging an interest rate of 9% for a loan against insurance. The repayment period for this particular loan is 6 months. So if you decide to prepay your loan, you still have to pay the interest for 6 months.
Since banks levy interest rates depending on their base rates, loans against life insurance can be a better option.
While borrowing money against your life insurance policy you are mainly borrowing money using the surrender value on your policy. Lenders generally levy an interest rate of 9% to 11% on loans against insurance policies.
Firstly you have to contact the insurance company to know about the details of the loan procedure. To initiate the lending process and avail loan you must submit some mandatory documents that help lenders verify and measure your credibility as a borrower. They are as follows:
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Some of the main benefits you can get by availing loan against your insurance policy are given below:
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So not only it provides you insurance coverage but also comes handy in the situation of a cash crunch. However, it is prudent to pay back your loan as soon as possible to keep your policy in force.
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