A secured loan is often a better alternative than an unsecured loan when someone is looking for borrowing options because it has fewer eligibility requirements, a lower interest rate and allows one to borrow a bigger amount. Since borrowers also provide collateral in a secured loan, the risk for lenders is also significantly less. However, most people avoid this kind of loan due to the unavailability of property or due to the disinterest in engaging the property in a loan. Individuals looking for an alternative to conventional secured loans must know what a loan against a life insurance policy is and how it works.
What is a loan against an insurance policy?
The name “Loan against Life Insurance Policy” itself is enough for advocating what this loan is and how individuals can get the credit. Individuals need to assign their life insurance policy as collateral in favour of a lender to get this secured credit. Owing to this secured nature, lenders may extend a high loan value which may go up to Rs. 25 crores (which can vary across lenders).
A loan against a life insurance policy can serve as one of the most convenient ways to get a high-ticket credit. This is because borrowers will not have to collateralise their properties and will not be required to take any high interest personal loans. As a result, they can meet the emergency credit requirement, keeping the interest rate as low as possible..
How does a loan against a life insurance policy work?
A loan against a life insurance policy is a financial contract between individual borrowers and lenders. According to this contract, lending institutions give a loan amount basis the surrender value at the discretion of lenders, which borrowers will have to repay within tenure as may be stipulated by the lender.
The amount individuals can borrow depends mainly on the surrender value of the life insurance policy, the loan-to-value ratio offered by the lending institution, and whether the policy is in lock-in period or not. Generally, lenders offer around 50% of the collateral’s value. It means that willing borrowers can request an amount of up to 50% of the surrender value of their life insurance policy. However, this shall vary and shall be subject to change at a sole discretion of each lender.
Besides knowing what a loan against a life insurance policy is and how it works, individuals also need to be aware of several other factors regarding this credit facility.
Benefits of taking a loan against an insurance policy
Individuals will get the following advantages by taking this loan against an insurance policy:
- Minimal documentation: The documentation process of a loan against a life insurance policy is short and simple. Individuals will only have to submit their basic KYC documents along with the policy papers and requisite loan, security documents as may be stipulated by the lender.
- Extensive repayment period: With a tenure in the range of 1 to 8 years, it will not be a hassle and financially hectic for borrowers to repay their debts.
- Easy collateral: Finding collateral suitable for mortgaging can be a hassle. Individuals may also not want to engage their properties in debt obligations. This loan against life insurance policy will suit them the best as they will have to assign their life insurance policy in this circumstance.
- Secured funding: Policy loans are secured by the insurance policy itself, which often results in lower interest rates compared to unsecured personal loans.
- Quick and easy process: The application and approval process for policy loans is typically simpler and faster than traditional loans, requiring minimal documentation.
Here are the things individuals will need to know about this loan:
- Eligibility for collateral
Individuals can borrow this loan by assigning their life insurance policies that come with a surrender value in favour of a lender to secure the loan. Since the term insurance policy does not come with any surrender or maturity value, lending institutions do not grant it as security for the credit. - Interest rate
Financial institutions determine the applicable interest rate on these loans by taking into consideration the premiums paid by borrowers till date. Borrowers who have paid more premiums towards their insurance plan can get the loan against insurance policy interest rate comparatively lower than the customers who have paid a lesser number of premiums. Generally, the interest rate on this type of loan ranges between 10-15% p.a. - Repayment period
Lending institutions extend around 1 to 8 years of time frame to repay a loan against a life insurance policy. They also need to bear in mind that, after taking the loan, they will have to pay both instalments for the debt and the premium for the life insurance policy. So, they should ensure that the Instalment for the loan is within their budget. - Loan amount
The loan amount is usually a percentage of the surrender value. Bajaj offers upto 90% of policy value as loan.
How much money can be borrowed from life insurance as the loan amount?
The loan amount you can borrow from your life insurance policy depends on the surrender value that your policy has acquired. However, financial institutions and insurance providers typically offer a percentage of the policy's surrender value as the loan amount. The specific percentage may vary among different insurance providers and financial institutions.
With Bajaj Finance Limited, you can usually borrow up to 90% of the surrender value of policies. It's important to note that the exact terms and conditions may differ, so it is advisable to check with your specific insurance provider or financial institution to understand the precise loan amount you are eligible for.
What points to keep in mind while borrowing a loan against life insurance policy?
A loan against a life insurance policy is indeed a convenient option for individuals with a credit shortage. However, before borrowing, it is essential to have a basic idea about this credit option to get the best offer on this loan on security
Why Loans Against Insurance Policies are becoming more popular
Top-up loans have gained popularity among individuals seeking quick financial relief. Their flexibility in repayment and the convenience of deducting the loan amount from the insurance claim have made them attractive, especially for those facing financial hardship. Additionally, the relaxed eligibility criteria, including a lower credit score threshold, further contribute to their appeal.
However, it's essential to consider the potential drawbacks. While top-up loans can provide immediate financial assistance, they can also reduce the overall death benefit payable to beneficiaries. To mitigate this risk, it's advisable to purchase a separate term life insurance policy to ensure adequate financial protection for loved ones.
Before deciding to take unsecured credit, individuals should have a proper idea about what a loan against a life insurance policy is and how it functions. Availing credit through this facility can significantly help them get financial assistance quicker without collateralising their immovable assets.
