Need cash fast? Here’s how you can borrow money against your life insurance policy

The Insurance Regulatory and Development Authority of India (IRDAI) recently introduced a change aimed at benefiting policyholders by allowing them to utilize the accumulated funds in their life insurance policy’s cash value through a policy loan feature. This allows access to financial assistance for unforeseen needs without the necessity of surrendering the entire policy.

A lesser-known fact is that policy loans often offer lower interest rates compared to alternatives such as personal loans or credit cards, potentially leading to significant savings on interest payments over time. Obtaining a policy loan is generally faster and more straightforward than applying for traditional loans because the insurer already possesses your information.

As of now, this option is available for traditional insurance policies like money-back and endowment plans, which combine savings with life coverage. However, unit-linked insurance plans (ULIPs) and term insurance policies are generally not eligible as collateral for such loans.

How to secure a loan against insurance policies?

A loan secured against an insurance policy allows you to use your existing life insurance to meet short-term financial needs. The critical aspect involves using the cash value of your policy as security for the loan. This cash value represents the accumulated savings within your policy. Typically, lenders permit borrowing a percentage (often between 60% to 80%) of this cash value, which constitutes the maximum loan amount available to you.

While the application process may vary slightly depending on the terms and conditions of each insurance company, the following are basic guidelines on how to apply for a loan against your insurance policy:

verify eligibility:Firstly, determine the type of policy you hold. Not all policies qualify for loans. Typically, only policies with a cash value, such as money-back or endowment plans, are eligible. Term life insurance policies generally do not offer loan options.

Additionally, your policy must have adequate surrender value. This is the amount you would receive if you were to surrender (cancel) the policy. Up to a predetermined percentage (typically 60–80%) of the surrender value, lenders typically permit borrowing.

Get in touch with your insurance company: Your insurer is the primary point of contact for information and application procedures regarding loans against your policy. Company representatives can verify your eligibility, address inquiries about interest rates, repayment terms, and any associated fees.

Check for requisite documents: Prepare to provide documents such as identification proof, address proof, and the original insurance policy document. Your insurer may have additional requirements, so it’s advisable to verify them in advance.

Check for online or offline application details: You may start the application process either online or by visiting a branch office. The insurer will assess your application and policy details. Upon approval, the funds will be disbursed using the agreed-upon method (such as bank transfer or cheque).

While seeking a loan against an insurance policy is easy, it is worthwhile to explore loan terms from other lenders in addition to your insurer. You may discover better interest rate offers elsewhere. Additionally, ensure you understand the repayment terms, interest rate, and any penalties for early repayment before committing to the loan. Also, failure to repay the loan may result in the policy lapsing and a decreased death benefit payout.

Benefits of seeking loan against insurance policy

Similar to other secured loans, you borrow the funds and then repay them with interest over a predetermined period. Taking such a loan has its benefits too which include:

• easier qualification: Obtaining a policy loan is often simpler than securing traditional loans because the insurance company already possesses your information, and the policy itself acts as collateral.
• Possibly lower interest rates: Policy loans typically feature lower interest rates compared to personal loans or credit cards.
• Minimal paperwork: Applying for a loan against an insurance policy often involves a streamlined process with less documentation required, as the insurer already holds most of your information on record.
• No credit check required: Unlike traditional loans, eligibility for a loan against an insurance policy is not based on your credit score. Instead, the loan is secured by the cash value of your policy, as previously mentioned.
• Fast disbursement: With the insurer already holding your information and your policy as collateral, the approval and disbursal of the loan can be expedited compared to other loan options.
• Maintains insurance coverage: While borrowing against your policy, the insurance coverage remains active. This ensures that your beneficiaries will still receive the death benefit, minus any outstanding loan amount.
• Tax-free access to funds: Funds obtained through a loan against an insurance policy are typically not subject to income tax.

These are some of the primary advantages of obtaining a loan against an insurance policy. Nevertheless, it’s essential to keep in mind that there are also potential drawbacks to consider. By following straightforward steps and carefully considering the potential consequences, you can confidently determine if taking out a loan against your insurance policy is suitable for your financial requirements.