How to Get a Loan Against Your Life Insurance Policy?

In India, taking a loan against an insurance policy is not very common, largely due to low awareness among policyholders. However, the situation is changing as loan providers are actively promoting this option, leading to increased consumer awareness. 

Modern life insurance policies have become extremely versatile, not only providing protective cover but also offering the option to take a loan against the policy in times of financial need. This additional feature allows policyholders to access funds quickly in case of emergencies, offering a valuable safety net for unforeseen circumstances. 

Important information to know about using your life insurance policy for a loan includes eligibility criteria, the loan amount you can access, the interest rates and repayment terms and the impact on your policy’s death benefit. It is crucial to understand the terms and conditions, potential fees or penalties and the consequences of not repaying the loan. Assessing these factors will help you make a wise decision about utilizing your life insurance policy for a loan. 

Loan Against Life Insurance Policies Definition

The “Loan Against Life Insurance Policy” is a type of secured credit where individuals use their life insurance policy as collateral to secure the loan. This allows lenders to offer a higher loan value, which can be up to 25 crore rupees, which might vary across different lenders. 

Taking out a loan against a life insurance policy can be a convenient way to access a significant amount of credit without having to use personal property as collateral or resort to high-interest personal loans. This can help borrowers meet emergency credit needs while keeping interest rates low. 

The approval for the loan is specifically applicable to traditional life insurance models like endowment and money-back policies. Term insurance policies are not eligible for the loan but unit-linked insurance policies are approved for the LAIP (Loan Against Insurance Policies). 

How Does a Loan Against an Insurance Policy Work?

Life insurance policy loans are convenient as they do not impact your credit score and do not require a lengthy approval process. Additionally, there is no need to explain how the funds will be used, giving you flexibility for various expenses. You can freely utilize the borrowed amount for anything from everyday bills to unexpected financial emergencies. 

LAIP is not considered income by the Income Tax Department of India so it is not subject to taxes as long as the policy remains active. However, it is important to note that insurance loans are usually expected to be repaid with interest, although the interest rates are typically lower compared to other types of loans. Additionally, there is no requirement for a monthly payment. 

Can I Get a Loan Against Any Life Insurance Policy?

No. According to the guidelines of the Insurance Regulatory and Development Authority of India or IRDAI, term-insurance policies and unit-linked plans are not eligible for loans. However, traditional insurance policies like money-back plans, endowment plans or whole life insurance policies may qualify for insurance policy loans. It is best to contact the specific lender to clarify which types of insurance policies are eligible for this option. 

What is the Minimum Eligibility Required for a Loan Against an Insurance Policy?

Eligibility criteria for loans against insurance policies include the policyholder’s possession of whole life or endowment plans that can be used as collateral. These loans offer relatively low interest rates, providing borrowers with access to funds - 

• The minimum age requirement is 21 years
• Both salaried and self-employed individuals are eligible to apply
• The applicant must be an Indian citizen
• Certain banks or financial institutions might require a minimum value for insurance policies to be used as collateral
• It is crucial to have a consistent and reliable income to meet the financial obligations associated with paying the interest amount

How Much is the Minimum Cash Surrender Value Required for LAIP?

To qualify for a loan on an insurance policy, the policy needs to have a surrender value. Typically, the loan amount approved is around 85% to 90% of the surrender value of the policy. 

How Do I Apply for a Loan Against an Insurance Policy?

Make sure to carefully review all of the loan documents and repayment terms before applying for a loan against your insurance policy, whether you choose to do it online or in person at the lender’s office. It is important to fully understand the terms and conditions to ensure that you are making a well-informed decision. 

Which Documents Will Lenders Ask For Loans Against Life Insurance Policies?

It is important for policyholders to fully comprehend the documents needed for obtaining a loan against their life insurance policy to facilitate a seamless application process. Understanding the required documentation will help avoid delays and ensure a smooth experience when applying for the loan. 

These are essential documents required when applying for a loan against an insurance policy - 

• To apply for a loan using a life insurance policy as collateral, you must submit the original policy document. This document acts as evidence of your ownership and contains all the details regarding the terms and conditions of the policy. It is crucial to ensure that the copy you provide is clear and includes any endorsements or amendments that have been made to the policy. 
• Complete the loan application form accurately and comprehensively. This form is required by financial institutions and insurance companies providing loans against life insurance policies. It captures important details about the policyholder, the policy, the loan amount and the loan purpose. 
• KYC documents are essential to adhere to regulatory requirements and confirm the policyholder’s identity. Typically, these documents include a government-issued photo ID, proof of address and passport-sized photographs, which are used to verify the applicant’s identity and address. 
• Policyholders must assign their life insurance policy to the lender to begin the loan process. This involves transferring the policy’s rights and benefits to the lending institution for the loan’s duration. It is important to note that this assignment is usually permanent and guarantees the lender’s right to the policy’s proceeds if the loan is not repaid.
• The loan agreement is a crucial legal document that delineates the terms and conditions of the loan, encompassing aspects such as the interest rate, repayment schedule, prepayment options and other relevant terms. Signed by both the policyholder and the lender, this agreement serves as a vital reference point throughout the entire loan tenure.
• Lenders may need proof of premium payment to verify that the insurance policy is active and that premiums are being maintained. It is crucial to provide the most recent premium receipts or statements to demonstrate that the policy is up to date. 
• Financial institutions require bank statements from policyholders to evaluate their financial stability and ability to repay. These statements offer a glimpse into the policyholder’s income, expenses and overall financial well-being. 
• It is important to provide income-proof documents when applying for a loan. These documents, such as salary slips, income tax returns or audited financial statements, assist the lender in assessing the borrower’s capacity on the loan amount and their specific requirements. 

What are the Benefits of Loans Against Insurance Policies?

The pointers below discuss the benefits of loans against insurance policies - 

• Accessing your loan funds through a life insurance policy is a hassle-free process. There is no need for approval, credit checks or income verification since you are borrowing against your assets. 
• Policy loans have lower interest rates compared to bank loans and do not come with high fees or closing costs. 
• Loan funds can be used for various purposes as the policy’s cash value serves as collateral. You have the freedom to utilize the money for anything from paying bills to going on a vacation. There is no need to explain to the insurance company regarding your intention to use the funds. 
• Policy loans offer repayment flexibility compared to bank loans or credit cards. Unlike traditional loans, there is no obligation for a monthly payment or a specific payback date. You have the freedom to pay off the loan in a short period or delay payments for an extended period.
• When you take out a loan from an insurance policy, the money is not considered taxable income, providing a tax advantage. You can borrow the entire cash value without owing to income tax, even on the earnings above what you paid in premiums. In contrast, withdrawing money from the policy would result in owing income tax on the earnings. 

How to Compare Loan Against Life Insurance Policy Offers from Different Lenders?

Here's a breakdown of how to compare loans against life insurance policy offers from different lenders - 

Particular	Comparison
Eligibility	Policy Type: Not all types of life insurance policies are eligible for loans. Traditional policies with a cash value component, such as money-back or endowment plans, generally allow for loans. However, term life insurance and unit-linked insurance plans (ULIPs) typically do not offer this. Surrender Value: The surrender value of your policy is crucial and represents the cash value that accrues after paying premiums for a specific period, usually around 3 years. It is important to ensure that your policy has a satisfactory surrender value to provide you with financial flexibility in the event of unforeseen circumstances. Loan-to-Value Ratio (LTV): The LTV ratio plays a crucial role in determining the amount of loan that lenders are willing to grant based on the surrender value of the asset. Typically, lenders offer a percentage of the surrender value, with the LTV ratio usually falling between 70% and 90%. This ratio represents the amount of the loan relative to the appraised value of the asset.
Comparing Loan Offers	Interest Rate: This is an important factor when considering loans against life insurance policies. It is advisable to search for lenders who offer the lowest interest rates, as these rates are usually lower than personal loan rates. Processing Fees: Be aware that some lenders may require you to pay processing fees as part of your loan setup. It is important to include these fees when comparing the overall cost of different loan options.  Repayment Options: When considering repayment options, it is important to take into account the length of the loan and the flexibility offered by the lender. Some lenders may offer the option of interest-only payments during the term, with the principal amount due at the end of the loan. This can provide flexibility in managing cash flow and may be suitable for certain financial situations.  Foreclosure Charges: Make sure you carefully review any potential penalties for paying off your loan early. Understanding these charges will help you make an informed decision about your mortgage. Make sure to clarify with your lender whether there are any fees or penalties associated with early repayment of your loan.
Additional Considerations	Loan Amount: Calculate how much loan you need to borrow. Then, compare this amount to the maximum loan amount available from different lenders based on your policy’s LTV ratio. This will help you understand which lenders are best suited to meet your borrowing needs.  Turnaround Time: When determining the turnaround time for obtaining funds, it is important to consider the speed at which different lenders process applications. Comparing the processing timelines of lenders will provide insight into how quickly funds can be received.  Customer Service: Before choosing a lender, it is important to research their reputation and customer service record. Look for reviews and ratings from other customers to get a sense of the lender’s reliability and responsiveness. By doing this research, you can ensure that you are working with a lender who prioritizes customer satisfaction.

 

Loans Against Policies: Repayment Details

The lender typically provides the repayment schedule, which is spread across the policy period. You have the option to repay the principal amount with interest payments or only make interest payments. If you choose the latter, the principal amount is deducted from the claim at the time of settlement. Additionally, if the policyholder passes away during the policy term, the nominees receive the net amounts after adjustment of the dues. 

What Can be the Consequences of Defaulting on a Loan Against a Life Insurance Policy?

If the policyholder fails to repay their premiums on a loan against a life insurance policy, the insurance policy will lapse. This means that the insurance policy will no longer be valid. They will be required to pay interest on the loan taken against the policy, as well as continue paying the premiums. Additionally, the insurance company can use the surrender value of the policy to recover the outstanding principal and interest. 

Conclusion

Loans against life insurance policies are gaining popularity in India as a convenient way to access credit. Policyholders can use cash value in their policies to address financial needs and enjoy benefits such as easy fund access, competitive interest rates, flexible repayment options and potential tax advantages. 

Before deciding on a loan against your life insurance policy, it is important to carefully think about the potential implications. You should understand the eligibility criteria, repayment terms and the consequences of not repaying the loan. Take the time to compare loan offers from different lenders and make sure you can comfortably manage the repayments. By doing so, you can use this option to your advantage and work towards your financial objectives. 

Frequently Asked Questions (FAQs)

Q: What is a Loan Against Life Insurance Policy?

A: A loan against life insurance is a valuable tool that enables you to borrow money by using your existing life insurance policy as collateral. In essence, your insurance policy serves as a safeguard for the loan. Failure to repay the loan could result in the lender exercising their rights to surrender your policy to recover their investment. 

Q: How long does it typically take to get a loan against my life insurance policy?

A: The processing time for a loan against life insurance can vary greatly based on the lender. It is typically faster compared to other types of loans, with many applicants receiving approval within a few days, especially when they have all the required documentation prepared.

Q: Can I repay the loan early?

A: Yes, you can prepay your life insurance loan without any penalties, saving on interest charges and regaining access to your policy's cash value sooner.

Q: What happens to my loan if I die while it's outstanding?

A: The death benefit from your life insurance policy will be used to pay off the loan and any interest, with the remaining balance going to your beneficiaries. 

Q: Are there any tax implications for taking a loan against my life insurance policy?

A: No, the loan itself does not count as taxable income, only the interest you accumulate on it is subjective taxes.

Q: Can I use the loan from my life insurance policy for anything?

A: The funds from a loan against your life insurance can be used for various purposes without any restrictions. You can use it to consolidate debts, handle unexpected expenses or make a downpayment on a purchase. 

Q: Should I inform my beneficiary about the loan?

A: It's important to inform your beneficiary about the loan on your life insurance policy so that they are aware of the amount they will receive after deducting the loan and any accrued interest from the death benefit payout.

Q: Can I challenge the loan value offered by my insurance company?

A: Yes, the loan value is determined by the cash surrender value mentioned in your policy documents. If you suspect any discrepancy, you can ask your insurer for a breakdown of how the cash surrender value was calculated.

Q: Is a loan against life insurance a good idea for retirement planning?

A: Be careful not to withdraw too much cash from your loan for retirement needs as it may deplete your policy's cash value. The death benefit is important for your beneficiaries, and a lower cash value will result in a reduced payout.