Should I surrender insurance policy or take loan against it?

Insurance policies come with multiple benefits. Not many people know that one can take loan against their insurance policies. If someone is in need of the money, they usually surrender the policy to get back whatever amount the insurance company returns. This may not be the viable option. Money9 spoke to Adhil Shetty, CEO, Bankbazaar.com, to clear the haze around this subject.

Query

I have an LIC policy for which I have been paying premium for last seven years and eight years are pending. The premium amount is Rs 50,000. I am in need of money. When I went to surrender the policy, I discovered I am not even getting back what I have paid so far – let alone the returns. What is more beneficial for me at this point in time? Should I take a personal loan or should I surrender the policy?

– Sharad Banerjee

Response 

The best way to save for emergencies is through bank deposits. These are liquid, easy-to-create and easy-to-redeem, provide safety of principal, and give moderate returns as well. Investments on the other hand lack some of these characteristics and therefore are not ideal to dip into during emergencies. This is also true about investment-linked insurance plans whose premature surrender leads to losses.

One of the best ways you can secure your finances is by locking liquidity in bank deposits for emergencies, buying a term insurance plan and health insurance plan for life and health risks, and investing in open-ended mutual funds that can provide good returns but can also be liquidated whenever you want. If you are averse to market swings and want something more stable, you could invest via the EPF or PPF which provide guaranteed, tax-free returns apart from capital safety but not immediate liquidity.

Options

For your current liquidity crunch, you may surrender your policy, but you will suffer losses. You could also consider any of the following options.

One – take a loan against your insurance policy. However, the loan given would be linked to your surrender value. This would allow you to keep your policy. Once the loan is repaid, you can reclaim your policy. Several banks and lending institutions offer such policies.

Two – take a loan against any other asset you can pledge, like gold, or a fixed deposit. Collateralised loans are cheaper than unsecured loans because you are providing a security against the loan.

Three – consider unsecured debt through personal loans and credit cards. You should go online to banks or loan aggregators to compare your pre-approved offers and avail one as per your need and eligibility. Since unsecured debt is not cheap, ensure you pay your dues in a timely manner.