Need a loan? Your life insurance could be the key
What's the story
Purchasing a life insurance policy in India not only protects your family's financial future but can also serve as a potential source for loans.
A majority of people are unaware that their policy can be used as collateral for a loan.
This article aims to demystify loans against life insurance policies, empowering policyholders with knowledge and potentially underutilized financial tool.
Basics
What is a policy loan?
A policy loan allows the policyholder to borrow against the cash value of their life insurance.
This is applicable to whole life or endowment policies, which accumulate cash value over time.
Since these loans are secured by the policy itself, their interest rates are typically lower than those of unsecured personal loans.
However, please note not all policies might qualify for loans.
Application process
How to apply for a policy loan
To avail a loan against your life insurance policy, first make sure it has adequate cash value.
Then, you simply contact your insurer with a loan request, fill out an application form, and provide any required documentation.
The maximum loan amount is typically determined by the policy's cash surrender value at the time of application.
Repayment
Repaying your policy loan
Repayment of your policy loan is highly flexible, with most insurers permitting you to repay at your discretion within the policy's tenure.
However, be cautious: if the loan plus interest accrues beyond the cash value, it will result in the lapse of your insurance coverage.
Hence, it's prudent to strategically plan repayments and monitor interest accrual.
Effects
Impact on policy benefits
Borrowing against your life insurance reduces its benefits.
If you die before repaying, the death benefit is reduced by the outstanding loan and interest.
Think about this impact, especially if leaving the full benefit payout is important to you.
Loans against life insurance provide an additional financial option without significantly disrupting other financial plans.