Loan against Life Insurance Policy: Is in an affordable option?

Loan eligibility applies to all insurance policies except term plans, reason being, term plans do not carry any cash value with it. Mostly, you can borrow up to 70-75% of the paid up value of the unit-linked policies.

Sep 04, 2015 11:09 IST India Infoline News Service

Do you feel that personal loans carry high-interest rates, which makes it an unattractive option for you? If yes, then you can bet on loan against life insurance policies, an option not explored by many. If you plan to take a loan against your life insurance policy, then you can relax with the fact that the interest rates will be lower on such loans as an insurance policy fulfills the security requirement.
 
Which policies offer loan eligibility?
 
Loan eligibility applies to all insurance policies except term plans, reason being, term plans do not carry any cash value with it. Mostly, you can borrow up to 70-75% of the paid up value of the unit-linked policies. For traditional policies, the loan borrowing percentage can be as high as 85-90%. Before accepting such policies, a lender will take into account the credit worthiness of the borrower.
 
Interest Rate
 
The interest on loan borrowed against the insurance policy depends on the number of premiums paid by the policyholder. Again, the rates also depend on the type of lender, i.e. life insurance companies or banks. As life insurance companies extend the loan for a maximum of six months only, therefore, the interest rate charged can vary around 9% on a half-yearly basis. On the other hand, banks may charge in between 10%-14% as interest depending upon the tenure of the loan and other factors.
 
How to avail such loan?
 
A policyholder will have to submit original life insurance policy to the lender and will be required to sign a deed of assignment. The policy can be terminated by life insurance companies if the borrower defaults on the premium payment. The policy is released after the loan is repaid in full. Also, if any claim arises during the tenure of the loan, then the outstanding amount will be paid only after deducting the outstanding loan amount. 

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