There may be moments when a financial emergency catches you off guard. There could be many reasons for it. Perhaps you might need to pay for emergency surgery, astronomically pricey college tuition, or the down payment on a house. Whatever the cause, there is a dire need for funding that crops up sometimes. What if you are unable to acquire the required funds? In such situations, your life insurance plan might become your savior!
The main goal of a life insurance policy is to give the policyholder risk coverage so that if the policyholder meets an untimely demise or any other event covered by the policy occurs (like a critical illness or partial disability due to an accident), the insurance company will pay out a sum assured to the nominee. However, life insurance plans also have several other advantages that make them suitable investments. For example, one of the many features of a life insurance plan is that you can take a loan on the same. Most financial institutions provide loans on certain types of life insurance policies with varying terms and conditions. Here’s learning more about the same.
Does your life insurance policy qualify for a credit facility?
A loan facility is not offered against all life insurance policies. Policyholders of term policies are ineligible to take out loans against them because those policies do not provide any cash value to the policyholder at maturity. The majority of ULIP plans do not also include a borrowing option. However, this benefit is typically offered to policyholders of money-back policies, endowment plans, whole-life policies, etc.
Remember that even if your policy has been pre-approved for a loan, you can only use this facility if your policy has accrued a Surrender Value. In addition, you must consistently pay your required premiums for at least three years from the policy’s start date for your insurance to achieve a Surrender Value.
Are there any advantages of borrowing against Life Insurance Plans?
Although not recommended in most situations, taking out a loan against life insurance can have advantages over other secured or unsecured loans (loans that need and don’t need collateral, respectively). Here are a few of them:
Competitive Loan Values
Before sanctioning a loan, banks and non-banking financial institutions consider several variables. Your monthly or yearly income, credit score, credit history, nature of employment, and other parameters are a few of them. If any of these are not optimum, you might not get the desired amount. On the other hand, your eligibility for a loan will be based on the Surrender Value your life insurance policy has amassed. Furthermore, banks and insurance companies will only provide you with a loan based on a portion of the policy’s surrender value rather than the full amount.
The loan amount you are qualified to receive will differ between banks and insurance companies. However, you can typically borrow a maximum of 90% of the policy’s surrender value.
Competitive Interest Rates
Interest rates on personal loans typically range from 12% to 15% or even higher. The EMIs can pile up if you witness sudden income fluctuations or unforeseen expenses. However, for loans against insurance policies, banks typically charge interest rates that are lower than those applied to personal loans. Your interest rate may vary depending on many variables, like the premium amount and the frequency of premium payments.
Drawbacks of Obtaining a Loan against an Insurance Policy:
While taking a loan against a life insurance policy has a few advantages, such as a decent interest rate, quicker approval, etc., you should only choose this option as a last resort.
A life insurance policy will offer financial security to your dependents if something happens to you during the policy period. Your nominees may be able to fulfil their immediate financial needs, pay off any obligations, and make future plans with the assistance of the death benefit.
However, if you take out a loan against your insurance policy and you pass away before paying it off, the lender will deduct the balance of the loan from the death benefit that would be paid to your nominee. As a result, the death benefit scheduled to go to your nominee will only be partially paid out. Naturally, this does make things more difficult for your family amidst such a stressful time. Such scenarios are thus avoidable if you can help them.
Summing Up
Any life insurance policy aims to ensure the financial safety and protection of our loved ones in the event of our untimely passing. For this reason, you should only use a loan against your life insurance policy when it is absolutely necessary or temporarily (you can repay the amount in a quick time). You don’t want to find yourself in a situation where the Maturity Benefit or Death Benefit is in jeopardy due to non-repayment of the loan in the event of your unfortunate and sudden demise. Hence, think hard and take a loan against your policy only if you have a proper and swift repayment strategy. This will help you meet sudden requirements while avoiding the depletion of the sum assured in the future.