All about Availing Loan Facility on a Life Insurance Policy

Many people are not even aware of the fact that they can avail loan on their life insurance policies. Simply put, we consider life insurance only to safeguard our and our family member’s lives. A life insurance would be a saviour to your family in case of unfortunate events but during hard times, you can also avail a loan against your life insurance policy simply by using it as a collateral.

Mentioned below is the simple question answer section to get a clear picture of this topic:

Are all the life insurance policies eligible to avail loan?

A life insurance policy needs to have an underlying value to be utilized as acollateral. You cannot pure protection plans such as a term insurance plan as a collateral in such a case.  However, life insurance plans that have both insurance-cum- investment features,wherein the investment part can be used as collateral. Thus, the same can be used for availing loan. ULIPs are however deemed as an exception to this rule since they do not offer any loan facility.

Can I avail a loan facility at any given time on such policies?

No, loan can be availed only post completion at least 3 policy years.

What amount of loan can I avail from such life insurance policies?

Loan can be availed only on the basis of the surrender value of your life insurance policy. This surrender value is the amount that your life insurer offers you in case you surrender the policy before maturity. Usually, loans range from 70% to 90% of the surrender value. Thus, if you have paid higher premiums they would be helpful in fetching a higher loan amount.

How can I repay my loan?

There is a lot of flexibility offered depending upon your requirement to repay your loan. You have an option of paying the principal loan amount plus the interest, anytime during the policy period. You can also repay the interest amount regularly and thenadjust the principal amount from the claim amount during the maturity of the policy. Your life insurance company deducts the principal amount of the loan from the total claim amount and then transfer the remaining amount to your account.

What documents should I need to get a loan facility on my life insurance policy?

The list of following documents are required in case of loans against your life insurance policy:

• Original policy documents
• Deed of assignment mentioning the insurance policy acting as a collateral. Thesebenefits of your insurance plan are transferred to the insurance company or bank till the time you don’t repay your loan
• Cancelled bank cheque
• Receipt of the payment of loan amount

What happens if I default the future premiums?

Your life insurance policy lapses in case you default in making the future premiums.Your insurance company has all the rights to recover the principal amount along with the outstanding interest from the surrender value. But, if you continue to make the premium payments and default on the interest repayment, then your loan and life insurance policy both will continue as long as the surrender value is higher than the accumulated interest and principal amount.