When insurance helps tide over financial crisis
If you have traditional life insurance policies like endowment or money-back, you can leverage them to secure a cost-effective loan
Insurance policy is a product which comes in handy after the passing away of a family member or during medical emergencies. But do you know it can help in times of financial crisis? Here’s how.
Life insurance not only covers financial risks within the family but also assists in obtaining loans during challenging times. In moments of sudden financial need, people often turn to friends and relatives for help. If that doesn’t work out, they resort to personal loans or loans through credit cards. The ease of obtaining loans through credit cards has made this business flourish, but it comes with an annual interest rate ranging from 16 to 48 percent.
If you have traditional life insurance policies like endowment or money-back, you can leverage them to secure a cost-effective loan. Nowadays, almost all life insurance companies offer this facility, making it a more affordable option compared to credit cards or personal loans. The process of taking a loan against an insurance policy is straightforward, and it doesn’t affect your insurance coverage. Some banks and NBFCs also provide loans against life insurance policies, and some institutions even offer loans against unit-linked insurance plans (ULIPs).
The amount of loan one can get on a life insurance policy is determined by the surrender value of the policy. Insurance companies offer a fixed amount if the policy is surrendered before maturity, known as the surrender value. This value is calculated based on the premiums paid up to that point, and the policy can be surrendered only after three years of premium payments. Life insurance companies typically offer loans ranging from 80% to 90% of the surrender value. If a company provides a loan facility on a unit-linked insurance plan (ULIP), it may offer up to 50% of the fund value. Rules regarding this vary among banks and companies.
Loans on life insurance policies are secured, making them easily accessible and relatively inexpensive. At present, insurance companies charge an annual interest rate of 9% to 12% on such loans. Consequently, loans on life insurance policies are considered cheaper compared to other options available in the market.
To avail a loan on a life insurance policy, companies have specific application formats. One needs to fill out a form and deposit it at the nearest branch of the insurance company, and insurance agents may assist in this process. Many companies, including LIC, offer the convenience of applying for a loan on the policy online through their websites, making the process quick and paperless. This not only saves you from the hassle of paperwork but also ensures a swift approval for the loan.
Personal finance expert Jitendra Solanki suggests that in case of a sudden need for funds when no other source is available, one can consider taking a loan on a life insurance policy. A loan taken on an insurance policy is often more economical compared to personal loans and credit cards. Almost all major banks and NBFCs, along with insurance companies, provide the facility of obtaining a loan against a life insurance policy. However, it is advisable to take the loan from the insurance company that issued the policy for a quicker and more cost-effective process, he says.
The repayment period for the loan on an insurance policy depends on the maturity of the policy. If your policy has been in force for five years or more, the insurance company may grant you a loan for a period of up to five years. Insurance companies offer various options for repaying the loan. You can choose to pay only the interest or pay both the principal and interest. The interest payment is typically deducted annually.
It is essential to make efforts to repay the interest on the loan taken against the insurance policy. Failure to repay the loan and interest will result in the interest being added to the principal amount. If the total amount of the loan and interest exceeds the surrender value of the policy, the company may close your policy. After this, you will not only lose the life insurance coverage but also any chances of receiving the maturity amount. If there are only one or two years left for the policy to mature, taking a loan against it may be more beneficial than surrendering it. This way, you will continue to enjoy the insurance coverage for the full term, and you may receive a higher payout at maturity.