Building a robust financial portfolio is important not only for future financial investments but it can come to your rescue in times of a financial crisis. Aside from term insurance, it is also recommended to invest in a guaranteed return plan for future financial security.
A guaranteed return insurance plan is a safe investment option that offers the dual benefit of insurance and investment. To overcome a financial crunch, you can use your life insurance cover or a guaranteed return plan instead of opting for an unsecured loan.
Eligible Policies to Apply for a Loan Against Life Insurance
A loan against insurance policies is only applicable towards a traditional guaranteed return insurance plan. These might include money-back or endowment policies, as these are viewed as a safe investment option by insurance companies to give a loan against.
A guaranteed return investment plan combines insurance with investment. This means that under its insurance component, if the policyholder were to pass away, the nominees receive a death benefit. Additionally, under the investment component of a guaranteed plan, if the policyholder survived the policy tenure, they are paid a maturity benefit. For a policy to be eligible for getting a loan, it must have a surrender value associated with it.
You cannot get a loan against your term insurance. This is because term plans don’t come with a maturity benefit, which is why this life insurance does not make the cut for the list of approved investments for securing a loan. For non-term plans, if your premiums have been paid promptly for three or more years, then a loan can be applied against it.
Undertaking a loan against insurance is like borrowing from yourself, which is why the process for loan application is not stringent. An important clause to bear in mind is that after taking the loan, the policyholder has to continue paying premiums for their guaranteed return plan. The failure to do so might result in a termination of the policy.
Permissible Loan Amount with Loan Against Policy
The approved loan amount needs to be verified by the bank or the insurance provider. It is usually a percentage of the maturity benefit under which the loan can be taken. Against a traditional guaranteed return investment plan, a loan amount of up to 90% can be taken. While ULIPs don’t have a loan against them, if a loan can be undertaken, the loan amount will rely on the current corpus value and the type of fund chosen.
The loan is sanctioned to the lender after the amount is decided. Additionally, since the loan is not an income, it is exempted from taxes.
Benefits of Loans Against Guaranteed Plans
Loans against a guaranteed return insurance plan are becoming a favourable option because of the benefits it offers. Here’s why you should opt for a loan against a guaranteed plan instead of choosing other options:
· When sanctioning a loan against life insurance, banks don’t check the applicant’s credit score. For loan seekers with a low credit score, this becomes a more favourable option.
· Getting personal loans against life insurance garners a significantly lower interest rate as opposed to a regular loan. The interest for a regular personal loan is usually between 12% to 24%, whereas for insurance-based loans, the interest rates are between 10.5% to 12.5%.
· Loans against a guaranteed return plan don’t require too many documents owing to which the loan is easily sanctioned.
· Finally, the policy value remains unchanged as opposed to loans against gold or shares.
How to Apply for Loan Against Insurance
The loan application process is fairly straightforward when applying for a loan against insurance. Following are the steps the applicant needs to follow:
· Step 1: To apply for a loan against your guaranteed plan, check with the insurance provider for the amount that you are eligible to receive.
· Step 2: After the loan amount is determined, apply for the loan and assign the policy to the loan provider.
· Step 3: Then, in the format prescribed by the lender, mention the policy details and the loan amount
· Step 4: Pay the charges levied by the bank, which might include the processing fee and other charges in addition to the rate of interest
Once the aforementioned steps are complete, the loan is sanctioned to the borrower within two to three days; however, the time may vary based on the lender. Upon loan sanction, the policy rights are automatically transferred to the lender as collateral. This policy is reassigned to the borrower upon repayment of the loan.
As for the documents, the commonly required include the original policy documents, deed of assignment, and a cancelled check.
Repayment of Loan Against Insurance Policy
The loan needs to be repaid to the borrower before the end of the policy term. The policyholder can either pay back the loan amount along with interest or only pay the interest for their loan. If the latter is chosen, the principal amount that is due is deducted from the maturity benefit during policy settlement.
It is important to note that if due to an unfortunate event, the borrower was to pass away during the policy term and they have only paid the interest rate, the bank will keep the pending amount that is due from the death benefit before returning the balance to the beneficiaries.
It is important to consider that the beneficiaries of the insurance policy can be more than one. Therefore, in the event of the unexpected death of the policyholder, the family members and loved ones are left vulnerable. To prevent this from happening, it is important to ensure the timely repayment of loans.
While it is easy to take a loan against your insurance policy, it is important to ensure its timely repayment. This is because investments are made for future financial security, and failure to repay the loan can leave you and your loved ones in a compromising position in the future.
The Edelweiss GCAP plan is a safe investment option that promises guaranteed returns. The highly affordable endowment plan from Edelweiss Tokio Life also enables you to take a loan against the policy if you are in urgent requirement of a cash flow.
For more details about the policy or the loan against policy feature, get in touch with our experts.
Swati Tumar - Travel & Finance Writer
Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations and other forms of content. She identifies herself as an avid traveller and shameless foodie.