What is Loan Against Insurance Policy and How to Get It?

Some insurance plans provide special loan options that allow you to borrow money from the insurance company during emergencies. This process is generally known as taking a ‘loan against insurance policy’.

All life insurance policies provide financial security for your loved ones in case of your absence. But Savings Pans/Endowment Plans and Unit Linked Insurance Plans (ULIPs) are types of insurance policies that provide financial help even while you are still alive. If your plan has a loan against policy option, then you can borrow a lumpsum amount through the policy for a reasonable rate of interest.

Do All Insurance Plans Have a Loan Against Policy Option?

No, generally loan options are only provided in savings plans and whole life insurance plans. Your policy’s terms and conditions will clearly mention if a loan option is available. If no loan option is mentioned, then it is unlikely that the insurance company will allow you to borrow money against your policy. Note that you cannot instantly take out a loan after buying an insurance policy. Your policy first needs to get a ‘cash value’, which can take a minimum of three years. Your loan amount will be around 85-90% of your policy’s current cash value.

Do Term Insurance Plans Have Loan Against Policy Options?

Term insurance plans generally have no savings element whatsoever, and purely provide life cover in exchange for premium. This is why most term insurance plans cannot be borrowed against. However, some term plans do offer surrender benefits, meaning that you will get back some money if you cancel your policy before the term end. For example, Edelweiss Tokio Life- Zindagi Protect offers the Special Exit Benefit that lets you reclaim your premiums paid if you cancel the policy after a specific number of years.

Keep in mind that a surrender benefit is not at all the same as a policy loan, as you will be cancelling your policy and will no longer be protected by life cover.

How Does a Loan Against Policy Work?

Savings plans use one part of your premium to pay for your life cover, while the other part is invested to create for a savings corpus for your future. As the years go on, this savings corpus will grow in value. This saved amount is known as the cash value of your insurance plan. Some insurance plans even allow you to directly withdraw money from your cash value after a few years.

However, most savings plan only give back this saved amount upon reaching term end as a maturity benefit. While the cash value is technically your savings, it is generally invested into bonds and other market funds and cannot be easily pulled out by the insurance company.   

But insurers understand that financial emergencies can strike at any time. We cannot always be prepared for every possibility. This is why some insurance policies, such as Edelweiss Tokio Life- Premier Guaranteed STAR, offer loan facilities for emergencies. When you take a loan on your policy, you receive a part of the cash value as a lumpsum payment. You are free to use this money however you want.

What is the Rate of Interest for Policy Loans?

The rate of interest for policy loans depends completely on your policy’s terms and conditions. On average, the interest rate for a loan against policy is around 10-15% per annum. This interest rate will be determined by the insurer when you opt to take a loan against your policy.

What is Used as Collateral for a Policy Loan?

The salient feature of every insurance policy is the life cover/death benefit it provides. When you take a loan on policy, you get the cash value in hand and your death benefit amount is used as collateral. If you pass away without repaying the loan, then the loan amount plus interest will be deducted from the death benefit payout to your family. So, ensure that you repay your policy loan as soon as possible to avoid putting your loved ones in financial jeopardy in the future.

Benefits of Taking a Loan on Policy

Below are some of the key benefits of taking a loan on your insurance policy:

• Quick access to cash- Taking a loan from a bank can be a difficult process. Moreover, your loan request might even get denied based on your current income and liabilities. A policy loan, on the other hand, if granted to you quickly and with minimum hassle. If you need quick access to cash and are struggling to get a loan, then a loan on your policy might be the best course of action.
• Rate of interest might be lower- Interest rates for loans keep fluctuating. If you are unable to find a loan with a reasonable rate of interest, then consider opting for a loan on your insurance policy.
• Avoid policy lapse- Unable to pay your premiums? Don’t let your policy lapse! Consider getting a loan on your policy to pay for your premiums. Remember that premium payments need to be made within 15-30 days (depending on your policy’s grace period) of the deadline, and failure to do so leads to your policy getting lapsed. A policy loan will help you keep your plan active, and you can then pay back the loan in the next income cycle.

Are Insurance Policy Loans Defaultable?

Loans taken on insurance policies generally do not have a time limit. This means that you can pay back the loan at your own pace. However, keep in mind that you have ultimately taken out a loan, and all loans incur interest. If your delay your loan repayment for too long, then the interest incurred may surpass your death benefit, in which case your policy will lapse.  

 

Neha Panchal - Financial Content Writer

Neha used to be an Engineer by Profession and Writer by passion, which is until she started pursuing full-time writing. She's presently working as a Financial Content Writer, with a keen interest in all things related to the Insurance Sector.