Secured loans such as home loans and loans against properties have been some of the most popular credit facilities for ages. But borrowers can even opt for loans against life insurance policy while looking for a secured credit facility.
A life insurance policy is a type of security against which you can easily avail a loan during a financial crunch. A loan against a life insurance policy is not only beneficial for borrowers but also for lenders since it reduces the risk of bad debts. This article talks about the pros and cons of loans against life insurance policies.
Pros of a life insurance policy loan
The following are some beneficial factors of availing a loan against a life insurance policy:
- Reasonable interest rates
One of the top advantages of a loan against a life insurance plan is the lower interest rate at which a borrower can avail of the credit. Since this loan facility is offered by collateralising the life insurance policy, it becomes easier for a lender to offer the loan at a lower interest rate compared to unsecured loans with high interest. This, in turn, reduces the total cost of a loan for a borrower. - Easy availability of loans and less documentation
Easy accessibility and convenience are other advantageous factors that give a loan against a life insurance policy an upper hand over other credit facilities. Here, borrowers do not need to undergo the tedious documentation process to avail of the loan amount.
Instead, they can avail of the credit amount within just a few days of application and document verification. During paperwork, borrowers just need to submit the KYC documents and a copy of their insurance policy for verification. - Extensive repayment tenure
One of the best pros of life insurance policy loans is the extended period for repayment allowed. This loan is provided with tenure of up to 96 months so that it does not become financially troublesome for borrowers while repaying. - Credit limit
The financial institution sanctions a credit limit against the securities pledged i.e., a life insurance policy in this case. The loan amount is set up as a line of credit from which borrowers can withdraw money as and when required. The interest is only charged on the money withdrawn for the length of time and not on the total sanctioned loan amount.
For instance, assume that the total sanctioned credit limit is Rs. 20 lakhs and you withdraw Rs. 5 lakhs, which you repay after 6 days. The interest will be charged on Rs.5 lakh for 6 days and not on the total sanctioned amount of Rs. 20 lakhs.
- Tax benefits
In some cases, the interest paid on a life insurance policy loan may be tax-deductible. However, it's important to consult with a tax professional to determine your specific eligibility. - Quick and easy application process:
The application process for a life insurance policy loan is typically straightforward and can be completed online or in person. - Can be used for various purposes
You can use the funds from a life insurance policy loan for any purpose, such as medical expenses, home renovations, or debt consolidation.
Cons of a Life Insurance Policy Loan
Availing a loan against a life insurance policy is usually ideal for an individual, but it has several limitations as well. These include:
- Lesser loan amount
When it comes to a loan against a life insurance policy, the credit amount is only sanctioned against the surrender value of the insurance policy and not the assured amount. Policyholders also are required to wait for a certain period for accumulation of ample surrender value. Hence, a loan against a life insurance plan early in the tenure may not raise a substantial amount. - Waiting period
While looking for a loan against a life insurance policy, borrowers should verify its waiting period beforehand. Even though the waiting period varies among insurance providers, it usually ranges between 2 to 5 years. This is usually a lock-in period for life insurance policies. After this period, the lenders may disburse the credit amount as per the estimated surrender value. - Managing both the loan and the insurance policy simultaneously
A borrower may have to pay the life insurance policy premium along with repaying the availed loan at the same time. Without proper financial planning, borrowers may likely fall into a severe debt trap. If an individual fails to pay the premium, the insurance policy will lapse. Simultaneously, borrowers also must pay the loan Instalments within time. - Policy eligibility concerns
Another factor to be considered when availing loan against a life insurance policy is the eligibility concerns of the life insurance policy. In other words, these loans are restricted to certain types of life insurance plans. Borrowers can only avail of these loans against traditional life insurance plans and not against a term plan. These traditional plans comprise money-back plans, endowment policies, whole-life insurance plans, etc. - Limited access to cash value
The amount you can borrow against your life insurance policy is typically limited to a percentage of the cash value. This means you may not be able to access the full value of your policy in case of an emergency. - Limited flexibility
Once you take out a loan against your life insurance policy, you may have limited flexibility in terms of making additional payments or changing the terms of the loan.
How to apply loan against life insurance policy?
Step-by-step process to apply for loan against insurance policy with Bajaj Finance Limited:
Step 1: Click on ‘Apply’ at the top of this page to open our online application form.
Step 2: Enter your name, email ID, and mobile number.
Step 3: Under ‘Type of Security’, select Insurance Policy and provide your surrender value.
Step 4: Select your city of residence and after agreeing to the terms and conditions, click ‘Submit’.
You will receive an OTP on the mobile number for verification. Enter the OTP to submit the form.
Once your application form is submitted, our representatives will get in touch with you for further proceedings.
Disbursement shall be done post complying with sanction terms, successful verification of application and policy assignment.
From the above discussions, borrowers should have a crystal-clear understanding of the pros and cons of life insurance policy loans. Although this form of credit has some disadvantages, obtaining a loan through this facility can help an individual get faster financial support without pledging their physical assets.
