MUMBAI
:
Traditional insurance policies have a fixed maturity period. Until these policies mature, policyholders cannot withdraw funds.
However, if you are facing a temporary cash crunch and don’t want to surrender your policy, a loan against it can be an option. Here is a look at how it works and why policyholders must be careful when opting for it.
Which policies are eligible
A loan can be taken against traditional policies like money back, endowment, or whole-life policies, which offer a surrender value. “As soon as the policies acquire surrender value, they are eligible for policy loans. While insurers can’t offer loans against unit-linked insurance plans (ULIPs) as per regulations, lenders do offer loans against ULIPs, including some who offer loans during the lock-in period,” said Satprem Mohanty, co-founder of ValuEnable, an insurtech with a digital-loan-against-policy platform.
“As per the new rules, a policy acquires surrender value after the first year of the policy term,” said Abhishek Bondia, co-founder of SecureNow, an insurance broker.
Since term plans don’t offer a surrender value, these are not eligible for a loan against a policy.
Terms of loan
“The insurance company offers these loans at 8-10% interest rate,” said Shilpa Arora, co-founder and chief operating officer of Insurance Samadhan, a platform focusing on investor grievances.
The insurer will stipulate the loan repayment terms. The loan can also be foreclosed by paying the outstanding dues, but check for any prepayment charges.
The maximum loan that can be availed is typically 80-90% of the policy’s surrender value. The tenure of the loan cannot exceed the term of the policy. If the loan is not repaid in time, the insurer can recover the outstanding dues from the policy’s surrender value.
If the outstanding dues exceed the surrender value, the insurer may terminate the policy, depending on the terms and conditions of the loan. However, there is a rare chance of this as the loan amount is pegged at 80-90% of the surrender value.
“Repayment of a loan against insurance can be done in parts or as a lump sum payment. Any payout—whether survival benefit, maturity, death, or surrender—will first be adjusted against the outstanding loan and interest. The remaining will be paid to the customer. The loan against life insurance policy comes without any requirement of a collateral,” said Rajesh Krishnan, chief of operations and customer experience, Bajaj Allianz Life.
Takeaways
The interest rates on such loans are likely to be higher than returns expected from such policies. So, opt for such loans only to meet temporary shortfalls.
If the policyholder is no more, the insurer will pay only the partial death benefit to the policyholder’s family after first clearing off all the outstanding dues.
Consider other alternatives to raise funds, as an insurance policy can help secure your family’s finances in the event of your death. A loan against an insurance policy should be your last resort.