There are two different types of loans available in the market- secured and unsecured loans. Personal loan top the list of unsecured loans which bites in the back later on. When hit by a cash crunch, availing a personal loan is not the only option left. You can encash your insurance policy to avail of a loan as well.
Following are the things you need to consider before availing a loan on your insurance policy;
On which policies can I avail of a loan?
Life insurance policies like unit-linked policies, endowment policies and money-back policies are the ones eligible for availing a loan. For these policies, premiums for at least three years must have been paid. Policies that do not have any surrender value do not stand eligible since there is no surrender value linked to them.
What are the advantages of a loan against insurance?
There are several benefits to availing loans against an insurance policy.
Exemption of CIBIL score: While lending loan against an insurance policy, the banks do not check your CIBIL score. Hence, if you do not have a good CIBIL score, it is a great opportunity for you to avail of a loan.
Lower interest rates: The interest rates on loan against insurance are lower than interest rates on personal loan otherwise ranging between 10.5% to 12.50%.
Quick processing: Since there is minimal documentation involved as the insurance company already has your documents verified, the processing of the loan is quick and the disbursement of money is faster.
What is the rate of interest and amount of loan?
The amount of loan is different for different policies. It is also dependent on the tenure remaining of the policy. For example, Birla Sun Life allows a minimum loan of Rs. 25 lakhs against the insurance policy. The amount of loan and rate of interest is computed differently for ULIPs and conventional insurance policies.
In the case of ULIPs: The current market valuations determine the amount of loan corpus. You can avail up to 40% of the corpus if more than 70% of your funds are invested in equity.
In case of conventional insurance policies: The sanctioned amount can reach up to 80% to 90% of the surrender value given that all the premiums are paid for last three years.
As far as the rate of interest is concerned, the amount of installment and number of installments is considered. The rate of interest is inversely proportional to the premium amount. Generally, banks link base rates to interest rates.
What are the tax benefits?
Since the income tax department does not recognize loan amount as income, there is no tax levied on it.
What happens in the case of default in repayment?
In case you are not able to replay the moan amount, your insurance policy gets affected adversely. In case the insured person dies while the loan amount is still unpaid, the beneficiaries get the due amount upon deduction of the remaining loan amount. In case the interest amount and outstanding premium are equal, the policy gets terminated.
How to apply for a loan against insurance?
You can simply ask your insurance company to issue a loan to you for which you are eligible. Once you apply for the loan and assign the policy to an insurance company, all your rights on the policy will get transferred to the lender. It takes around two to three days for the loan to get sanctioned upon document verification. Once you repay your loan, the policy gets reissued to the insurer by an endorsement.
What are the required documents?
Following is the list of documents required;
-Original insurance policy
-Deed of assignment