Just like any other loan, even life insurance policy loans have their own pros and cons. It is essential to look at both aspects before making the decision to borrow this loan.

Pros

When getting a loan against a life insurance policy, the process is quite simple. This is because you are borrowing this loan against your personal assets and no approval process needs to be followed for income verification or credit checking. Moreover, policy loans have lower interest rates compared to other bank loans that come with higher interest rates.

In many cases, life insurance loans are even tax-free and can be availed within five to 10 working days. You can even choose the funds for a loan against life insurance policy the way you want. Just because your policy’s cash value serves as collateral for the loan, you can use the money for any purpose – from household billing to vacation funding.

The insurance company won’t require any explanation for how you wish to spend your funds after getting the loan. Unlike the credit card or bank loan, there is also no need to pay a monthly amount for your insurance policy loan and there is no payback date either.

Cons 

If the loan borrower dies before paying the loan, the loan amount and the interest have to be paid by the beneficiaries. This could cause a problem to the beneficiaries if they were intending benefit from that insurance policy.

If this loan amount is unpaid, the interest adds to the principal amount of the loan. If the balance of the loan increases more than the cash value amount, this policy could even lapse and cause risk of termination from your insurance company.

To know more about the loan against life insurance policy and its and pros and cons, click here: Loan Against Life Insurance Policy – Here are Some Pros and Cons!

There are certain points to consider before you opt for a loan against an insurance policy. These points will help you understand the terms and conditions of the loan application.

These points are as follows:

Eligible policies

Not every insurance policy is qualified to serve as collateral for a loan against policy. Therefore, you have to cross-check if his/her policy is eligible by going through the eligibility criteria.

The surrender value 

The current value of your policy decides the loan amount or the amount of limitation. For example, if you have an insurance policy of Rs,10 Lakh; you will be unable to receive Rs.10 Lakh during loan processing. The loan amount is not based on the policy’s maturity value.

Average waiting period

Normally, there is a waiting period of about three years before you can apply for a loan against policy.

Dealing with defaults

Your policy will lapse in case of any default with the payment system. In such a case, the due amount will be adjusted from the surrender value. This will also be unable to safeguard you and your family and undermine the purpose of investing in an insurance policy.

Repayment system

You have an entire insurance policy term to repay the loan. You can either pay back the principal amount earlier or continue paying the interest every month. The rest of the loan amount will be settled against its claim once the insurance policy reaches its maturity.

Make sure that you keep these points in mind before you go for a loan against policy.

To know more about the loan against policy, click here: 5 Things To Remember While Taking A Loan Against An Insurance Policy

If you are in an emergency situation and need cash urgently, you can apply for a loan on the insurance policy. Your life insurance policy provides you protection, as well as long-term financial security at difficult times.

Which Insurance Policies can help you avail loan? 

Loan on insurance policy like the money-back policy, endowment policies and unit-linked policy can be utilized for a loan. For these insurance policies, you pay premiums for at least three years; hence they are eligible for a loan. But the term insurance doesn’t help you avail loans, as it does not carry any surrender value.

Benefits of loan against insurance policy: 

• No need for CIBIL Score: When sanctioning loan on an insurance policy, banks don’t check your CIBIL score. So, getting a loan against insurance is a good option for people with low CIBIL score.

• Low-interest rate than other personal loans: Loan on an insurance policy is considered one of the great personal loan alternatives. This is because the interest rate on loan against insurance is only 10.50% to 12.50%, whereas on personal loans you generally have to pay interest somewhere between 12% and 24%.

• Quick loan disbursement: To avail a loan against insurance, there is a minimal amount of documentation and fewer chances of rejection. So, it gets sanctioned quickly compared to other loans. 

• Tax benefit if used to buy or construct a house: The interest on loan against insurance policy can be deducted from the chargeable income under the head “income coming from your house property.” However, this loan amount must be used for repair or reconstruction of the property. 

Although, most people think that a traditional life insurance policy is the one which offers benefits in case of death of the policyholder. However, with time several products got added to the initial policy to help you save and invest better. One of which is the feature of getting a loan against your policy.

But before you think of getting loan against your life insurance policy it is important to know if this lending will make sense to you. You may get in touch with your policy provider to analyse the impact of loan on your policy with in-force illustration.

Loan against life insurance policy

Whether taking a loan against your life insurance a good decision, let’s find out - 

Easy to borrow - It may be noted that borrowing from your insurance company will be easier since you are already their member. Here, the cash value of the policy acts as collateral against the loan. In case of failure to pay it back the lender can take away the cash value of the policy or the death benefits of the policyholder to compensate their claims.

Requires planning - One must plan cautiously and closely monitor the cash value and loan so as not to default and to manage your finances effectively. You can make use of in-force illustration to know the impact.

Plan the loan - You can only get the loan against your policy when you have built a substantial cash value. The right time to avail the loan can be discussed with the representative of your insurance provider to help you make the right decisions.

For more information related to this, read this full blog: How to Easily Avail Loan Against Life Insurance Policy