Your insurance policy offers peace of mind to you and your loved ones in case of an accident, serious health issues or death, depending on the kind of insurance you have. However, did you know that you can avail loan against an insurance policy to meet your short-term financial needs?

Here are some details that you should know before you decide to take a loan against your insurance cover. 

You can Get Loan Only Against Specific Insurance Policies

Not all insurance policies can be used as a loan against the insurance policy. Some lenders will provide loans against endowment, whole life, and money back policies while others will accept ULIPs and term policies. Usually, lenders lend up to INR10 crore against high-value insurance policies that can be repaid in 12 months.

Waiting Period After Buying the Policy

It is not possible to buy an insurance policy and immediately use it as collateral for a loan. If you do it, your application will be rejected. You need to wait a minimum of three years after buying your insurance policy to apply for a loan. So, make sure you first talk to your insurance provider and lender before applying for a loan against the insurance policy.

How Much Loan Can You Avail?

If you think that you will get a loan amount that is equal to the value of your insurance policy, you are mistaken. Most lenders will offer up to 50% of the policy’s surrender value. For instance, if the surrender value of a policy is INR 1 crore, you will be able to get a loan amount of INR50 lakh. This said, the older the policy, the higher the loan amount the lender will offer.

These are some of the essential aspects of loan against an insurance policy that you should know.

To know more about the loan against insurance policy, click here: All You Need to Know About a Loan Against an Insurance Policy

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.