The primary purpose of purchasing a life insurance cover is to safeguard your family in the event of your untimely demise. However, over the past decade, the meaning of insurance has widened to include investment products as well, as insurance companies have come up with different types of life insurance policies. Apart from pure term insurance, other life insurance products include endowment policies, money back plans and unit linked insurance policies (ULIPs).
However, today insurance is not only a means to provide risk cover and investment options, but also includes an option to secure a loan. Many life insurance companies and banks allow the policy holder to mortgage his life insurance policy to secure a loan to meet any contingencies or credit requirement. The terms and conditions of these loans vary from one lender to another. Let's look at some aspects of mortgaging your life insurance policy.
Why should you consider mortgaging your life insurance policy?
Mortgaging a life insurance policy is primarily to secure credit to meet your finance needs. This can be either short term or long term. However, a life insurance policy is a critical cover for your family in case any untoward incident happens to you and therefore one should give careful thought before mortgaging a life insurance policy. The advantage of mortgaging a life policy with the life insurance company is that you get the loan quickly, documentation is minimal and there is no chance of rejection. Even with a bank, the chances of rejection are minimal as the collateral is very secure. The rate of interest is also usually lower than personal loans offered by banks, which are unsecured in nature. This is a good option to explore for people with low credit scores.
How should you apply for a loan against your life insurance policy?
When you wish to mortgage your life insurance policy with the respective life insurance company, you will need to make an application to them in this regard. Similarly, if you want to borrow from a bank or NBFC against your life insurance policy, you will need to fill the loan application form in this regard and approach the nearest branch for this purpose. It must be remembered that life insurance companies and banks only lend against those life insurance policies which have a surrender value. Therefore, typically endowment policies are suitable for this purpose. Most banks do not lend against ULIPs and term policies.
What are features and terms of loan against your life insurance policy?
A life insurance policy acquires a surrender value only when you have paid at least three annual premiums of the policy. Therefore, you usually cannot borrow until 3 years of the policy have been completed. The loan amount is linked to the surrender value and differs from bank to bank. While life insurance companies offer a loan to value of up to 90 per cent of the surrender value, banks usually retain a larger margin of 15 - 20 per cent of the surrender value. The amount of loan you can acquire also depends on the nature of the policy. Banks usually have a preapproved list of policies against which they can lend.
The nature of facility offered by banks is in the form of demand loan or term loan or overdraft facility. Banks usually specify a minimum and maximum amount of loan which will be granted against life insurance policies. The policy is assigned to the lender when you take a loan.
Banks charge processing fees and other charges in addition to the interest rate when you apply for the loan. Interest rates charged by insurance companies are generally lower than that charged by banks, although this may depend on case to case. The interest rate charged by banks is linked to the base rate.
Life insurance companies who grant a loan against a policy require the borrower to pay the interest during the loan tenure and the principal is deducted from the final policy value. On the other hand, a loan taken from the bank is usually required to be repaid in the form of EMIs during the loan tenure.
How does this compare with other options of personal credit?
As mentioned earlier, a loan against your life insurance policy is taken to meet personal credit needs. Some popular alternatives to this form of loan are personal loans, loans against fixed deposit, gold loans, loans against shares and loans against Public Provident Fund. While a loan against a life insurance policy is less expensive when compared to gold loans, personal loans and loans against shares, the interest rate is almost at par with loans against fixed deposits or against your PPF.
However, if you mortgage your policy with the life insurance company, the loan can be granted faster and will require lesser documentation. However, keep in mind the drawback of mortgaging your life insurance policy as outlined below.
What is the drawback in mortgaging your life insurance policy?
The biggest drawback in mortgaging your life insurance policy is that if there is a death of the borrower during the tenure of the policy, then the beneficiary of the policy will not receive the full policy benefits. The amount of outstanding loan and interest will first be recovered and the remaining amount will be given to beneficiaries. Therefore one has to have sufficient life cover in place before they borrow against life policies.
BankBazaar.com is an online loan marketplace.
Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.
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