It is pretty important in the fast world today to get money quickly, be it for any kind of emergency or any new opportunity that comes in. If you already have a life insurance policy like term plan insurance, you can obtain a loan based on it without having to face stringent documentation and credit checks. In this blog, we are going to take you through the process of obtaining a loan based on your insurance policy.
1. Learn what a loan against an insurance policy entails:
Before applying for a loan against an insurance policy, people would need to be aware of what it actually is. It refers to any financial product where policyholders are free to borrow money by commitment against an insurance policy in order to secure the borrowed amount. It generally operates around the surrender value of the policy. This is the amount your insurance firm would pay you if you opted to give up the policy prematurely before it matures.
2. Loan Eligibility:
Ensure that you qualify for the loan under the basic conditions. These include the following:
- Type of Policy: All insurance policies are not eligible for loans. Normally, term plan insurance, endowment plans, whole life insurance, or unit-linked insurance plans (ULIPs) are eligible.
- Surrender Value: The insurer lends only up to a certain percentage of the surrender value of the policy, which is normally between 60% and 90%.
- Loan Limit: The loan amount is usually restricted to a percentage of the surrender value of the policy and cannot exceed a certain limit.
- Repayment History: The history of good repayment of premiums on your insurance policy increases your chances of getting the loan.
- Age and Policy Term: Some providers may demand a certain age at which you take the loan. You may be required to keep the insurance policy for some years before using the loan services.
3. Advantages of Taking Loan Through Insurance Policy:
You should read through the pros of taking up the loan that comes with availing your loan through the insurance policies.
- Quick access to funds: Loans on insurance policies are sanctioned much quicker than any ordinary loan.
- No credit check: Since your insurance policy is used as the collateral, the lender is least bothered about your credit score or even history, making it an ideal option for someone with less-than-satisfactory credit.
- Less Interest Rates: Generally, loans against an insurance policy come with lower interest rates as compared to those of an unsecured loan or credit card debt.
- Flexible Repayment Terms: Most of insurers allow flexible repayment terms so that you may repay the loan at your ease wholly or in small parts.
- Continuous cover: After borrowing the loan against your life cover, it will not be affected to any of your running cover. This is because all that is merely a collateralised borrowing against policy value.
4. The How-to Guide-Apply for the loan with your insurance plan:
Now, after knowing your basics, the process of application step by step is as follows:
Step 1. Check Eligibility of Your Policy
First of all, check if your current policy is eligible for a loan or not. As mentioned above, term plans do not have surrender values but endowment policies, whole life insurance, and ULIPs might be eligible. Contact your insurance provider or read the terms of your policy to confirm its eligibility.
Step 2: Calculate the Amount of the Loan
Now that you have determined that your policy does qualify, you will be determining the actual amount of your loan. A loan can be taken up to a certain percentage of your surrender value on your policy. Make sure that you know the difference between this loan and the cash value associated with your policy. You are responsible in lending against your cash value so that you will not lose any long-term benefits offered with your policy.
Step 3: Evaluate Terms and Interest Rate
Ask the insurer about the rate of interest, the duration of the loan, and which options are open for repayment. In some cases, the insurer agrees to a fixed rate, whereas in others, it has floating interest rates coupled with the scenario of the market. Compare all the terms, and ensure loan conditions are good enough to align with your repaying capacity.
Step 4: Collect all the Documents End
You usually will require the following documents to enjoy borrowing against your policy-
- Copy of the insurance policy.
- Proof of identity (Aadhaar card, passport, or driver’s license).
- Proof of address (utility bill, bank statement, etc.).
- Latest premium payment receipts.
- Surrender value statement, which is accessible from your insurer.
Step 5: Apply
Once the above documents are prepared, go to your insurance company in person or apply online. The insurance company will then scrutinize the documents and subsequently assess your eligibility for a loan based on the surrender value of your policy.
Step 6: Loan Processing and Approval
After submitting the application, the insurer will process your request. Approvals are mostly quicker since it acts as collateral for the policy. They assess the surrender value of your policy, loanable amount, and terms of repaying before finally approving the loan.
Step 7: Loan Release
Upon acceptance, the disbursed amount should be provided directly to either your bank account or as directed by the insurance company. Before agreeing on the disbursement, read and understand the loan document.
Step 8: Loan Repayment
The loans on insurance policies are generally pretty flexible when the disbursement takes place. Most insurer allows customers to pay back in EMIs or cash lumpy payment mode also. Now that being said do remember, unreleased loans would reduce a couple of advantages based on your cover. This is one such deal that should responsibly manage the plan of the loan.
5. Things to Consider Before Lending On Your Back Policy
A loan against insurance policy could seem to be the least trouble and fastest recourse. But remember that:
- Coverage: The loan, if unpaid, would recover from the proceeds of the maturity or death of the policy.
- Policy Lapse Risk: In the event of a non-repayment or missed premium, your insurance policy could lapse, which not only terminates your coverage but also affects the repayment terms of the loan.
- Cost of Borrowing: With interest rates being quite low, one should understand the complete cost of borrowing.
- Alternative Options: However, before reaching for a loan against your insurance policy, alternative options include taking a personal loan or peer-to-peer lending, not to mention taking out a credit card if the loan amount is small.
Conclusion
Taking a loan against an insurance policy, therefore, avails one quick and efficient access to funds, through the value already built up in life insurance. That way, knowing what the eligibility and loan limits for such loans would be along with potential risks can guide one in whether it is a correct financial solution or not. Holding term plan insurance or other life insurance policies that may have surrender values can mean an important liquidity need without necessarily causing any effect on your credit score.
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