Mr. Vighnesh Shahane
MD & CEO, Ageas Federal Life Insurance
With increasing awareness, propelled by technological advancements, the importance of having Life Insurance is slowly but steadily gaining recognition. People today are more proactive about purchasing life insurance plans. However, many do miss out on the multiple benefits that their policy offers in addition to the basic tenets of financial protection and wealth creation. One such benefit is the facility to take out a loan against a life insurance policy.
There are different types of life insurance plans designed to cater to different financial needs as well as different appetites for investment risk. There are term plans that provide pure risk cover, ULIPs that deliver market-linked returns and traditional plans that provide risk-averse returns.
So, which life insurance plans offer a loan facility?
A loan facility is not available across all types of life insurance plans. Traditional savings plans like money-back plans, endowment and whole-life plans offer a loan facility. These types of plans have an accumulated cash valueat maturity which will be paid out as per the terms and conditions of the plan. These plans offer the policyholder the facility to borrow a part of the accumulated corpus in case of any financial emergency.
Term plans, being pure risk cover plans, have no accumulated cash value and hence do not provide a loan facility. In the case of ULIPs, as the returns are market-linked and hence not fixed, these plans too, do not offer a loan facility.
Benefits of taking out a loan against your life insurance policy
In case of a financial emergency, taking a loan against your life insurance policy is often a better option than a personal loan or credit card loan for several reasonsnamely:
- Easier to avail: Getting a loan against your life insurance policy is much easier than getting a personal loan. This is because you are basically borrowing from your own savings, namely, the savings of your life insurance policy. So, you do not have to undergo a rigorous verification process to prove that you are capable of repaying the loan.That said, your creditworthiness is taken into consideration.
- Keeps your policy alive: The main purpose of the loan facility is to keep your policy alive. So, in case you have an urgent need for cash, you don’t need to surrender your policy but you can take out a loan against it.
- Lower interest rates: The interest rate on this type of loan is much lower than that of personal loans and credit card loans.
- Quick disbursement: As the life insurance company already has your details and documents, you do not have to worry about much paperwork and processing time.
- Flexible repayment options:Most plans offer flexible repayment tenures and the option to either pay back the principal amount with interest or just the interest to keep the policy going.
It is important to note that the terms and conditions of the loan facility under a life insurance policy vary across insurance companies and across different product offerings. The maximum amount of loan that can be availed, the rate of interest charged, the repayment options, etc., all vary from product to product.
However, some base conditions are common across products.
One being that a loan can be availed only after a certain period, usually two or three years since the policy start date, and provided that the policyholder has paid all renewal premiums as and when due during this period.
Another is that if, at any point during the policy term, the outstanding loan amount exceeds the total cash value of the policy, that is, the total value of the policy benefits, the policy will foreclose and the balance cash value, if any, will be paid to the policyholder.
One must also keep in mind the purpose of a life insurance policy which is to financially secure your loved ones in the unfortunate event of your death. If you have taken out a loan against your life insurance policy, then in the case of your unfortunate demise, the insurer will first clear off the unpaid loan amount, along with accumulated interest, from the death benefit that is due to your beneficiaries. Your beneficiaries will, therefore, receive only a partial amount of the death benefit that was due to them.
So, while the loan facility of a life insurance policy is a valuable benefit, it is important to be prudent while availing this facility.