Apart from providing cover, a life insurance policy can bail you out of a sticky financial situation as well. Loans are readily available against insurance policies and these kinds of borrowings are very popular simply because they allow you to borrow at lower rates. Whether you need some extra cash for your daughter's wedding or you need to invest money into your business, you can get the funds against your life insurance policy. There are some basic criteria that need to be met for the policy to qualify for a loan. Once those are met, the process of procuring the loan becomes very simple and you are able to get a lot of benefits out of your life insurance policy.
EligibilityType of policy
– Any policy, apart from money back plans, qualify for loans. A money back plan doesn't work simply because the funds keep depleting at regular intervals and so it cannot act as a surety for a loan.Age of the policy
– Any policy, older than 3 years, can be used to get a loan. In other words, you can use an insurance policy, the premium of which has been paid for a minimum of 3 years, to get a loan.Procedure
1. Check if your policy is eligible for a loan. Speak to your insurer or agent if you have any confusion regarding this.
2. Find out how much loan your policy entitles you to get. Based on this, you can decide the amount of loan you want. You may or may not require the entire amount available.
3. Make an application for the loan and thereby assign (transfer the rights of) the policy to either your insurance company or the bank.
4. The loan is usually sanctioned in 5 days, provided the paperwork and detailing is done accurately.Rate of interest
As of June 2012, LIC has been charging a rate of 10% on loans against life insurance policies. Private insurance companies such as Bajaj Allianz Life Insurance also charge a rate of 10%. Banks usually have a higher rate of interest. This is because banks do not have a fixed rate of interest. The interest they charge depends on factors such as the premium amount, premium already paid, etc.
The rates of interest charged on insurance loans are usually much lower than the rates of interest charged on regular bank loans.Repayment
A loan taken against insurance policies is different from traditional loans. This is because you aren't exactly obligated to repay the loan. The lender deducts the amount from the policy itself (without disrupting the death benefit). However, you need to continue paying the premium of the policy or else it will lapse.Conclusion
Loans against insurance policies are very beneficial. First of all, it is relatively simpler to procure such a loan. Then, the rates of interest are lower. Also, you aren't heavily burdened to repay the loan. As a result, these loans have become quite popular today. Rituraj Bhattacharjee, the head of market management, Bajaj Allianz Life Insurance, sums it up well. "Life insurance policies can be used as a collateral security for raising loans for some emergency funding that can be leveraged without losing the life cover." Reason enough for people to opt for such a loan.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
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