Many thrifty families have diligently saved in life insurance policies over many years, but when hit with a financial need, they struggle to access affordable credit. Loans are an integral part of financial planning, enabling individuals to access funds for various needs without disrupting their long-term goals. Now, loans against life insurance policies are easier to access, and offer an efficient solution. By leveraging the surrender value of life insurance policies, borrowers can secure funds for emergencies or planned expenses without liquidating their investments prematurely.
Loan against life insurance policy offers benefits like lower interest rates compared to unsecured loans, minimal documentation, and no need for additional collateral. However, understanding the types of policies eligible for such loans and the terms associated with them is crucial for making informed decisions.
Types of loan against life insurance policy
Different types of life insurance policies come with unique terms and conditions that influence a lender’s ability to offer loans against them. Below, we delve into the major insurance policies eligible for loan against insurance and the key factors to consider when borrowing against them.
- Traditional or Endowment Life Insurance Policies
Endowment policies are a popular choice for loans due to their guaranteed maturity benefits and are similar to RDs/SIPs in terms of premium payments as they involve regular, periodic payments over a set tenure. Loans against these policies are typically available once the policy acquires a surrender value, which usually happens after a minimum premium payment term, often two to three years.
Key Considerations:
(i) Loan amount: The loan amount is generally capped at a percentage (usually 80-90%) of the surrender value. Borrowers must ensure timely repayment to avoid policy surrender, as the policy serves as collateral.
(ii) Restrictions on Term: The loan term cannot exceed the policy's maturity period.
- Unit-Linked Insurance Plans (ULIPs)
ULIPs combine life insurance with investment, making them a dynamic option. However, loans against ULIPs are subject to stricter terms due to the market-linked nature of the policy.
Key Considerations:
(i) Lock-In Period: Lenders approve and disburse loans against a ULIP policy only if the lock-in period is nearly completed or has already ended. This is due to the restriction that if the policy is surrendered during the lock-in period, the surrender value will only be paid out after the lock-in period concludes.
(ii) Value Fluctuations: The fund value of the ULIP, influenced by market performance, determines the eligible loan amount.
(iii) Lender Risk: Lenders prefer to set lower loan-to-value (LTV) ratios for loans against insurance policies due to the associated investment risks. For debt-fund based ULIP policies, LTVs can go up to 70% of the surrender value, while for equity-linked ULIP policies, they are more conservative, ranging between 50-60%, reflecting market volatility.
(iv) Fund switching: Lenders do not permit switching of the fund type during the term of the loan. Any switch from debt to equity or vice versa is to be made before availing the loan.
3. Annuities, Retirement and Pension Plans
While pension plans primarily aim to provide a steady income post-retirement, lenders prefer extending loans against their accumulated corpus only during the accumulation phase.
Key Considerations:
(i) Policy Option selected during policy purchase: Not all policy options come with a surrender value. Policies with a surrender value enable loans, while those without, do not qualify for loan against insurance policy.
(ii) Accumulation Phase Only: Borrowing is typically restricted to the accumulation phase and not during the annuity payout stage, but again, there are some exceptions to this
(iii) Corpus Size: The loan amount is linked to the policy's accumulated value, which may be lower during the initial years.
(iv) Restrictions on Usage: Certain plans restrict policy surrenders to specific purposes, such as covering medical expenses. In such cases, lenders can only consider policies that do not include such restrictions for loan approvals.
(v) Deferment Period: For policies with a deferment period, surrender is only allowed within this period. In such cases, loan tenures are ideally aligned to end 6 months to 1 year before the deferment period concludes. This ensures repayment timelines are manageable and safeguard both the borrower and the lender. Policies that allow surrender anytime offer more flexibility for borrowing or repayment, making them less restrictive compared to those with a deferment period.
4. Money-Back Plans
Moneyback policies offer policyholders regular payouts at designated intervals, which are specified on the first page of the policy document. Based on the timing of these payouts, the loan approval process varies.
Key Considerations:
(i) No Payout: If no payouts are expected, the loan can be accepted without restrictions.
(ii) Payouts a Few Years Away: Loans are likely to be approved, but the loan tenure will be set before the payout date to align with the policy's terms.
(iii) Payouts a Few Months Away: In this case, the loan is typically rejected, as the surrender value (SV) will only be adjusted after the payout is received. The loan can be reconsidered once the payout is made and the SV is updated accordingly.
5. Whole Life Plans
Whole life insurance policies provide coverage for the policyholder’s entire lifetime, making them an excellent long-term option for loan against life insurance policy. A loan can be availed during the policy term, provided that the policy has met the specified conditions, such as having paid a minimum number of full premiums (e.g., at least two years, depending on the policy).
Key Considerations:
(i) Loan Terms: Loans can be granted based on the policy's surrender value, with amounts typically higher for in-force policies (those that are active with premiums being paid) compared to paid-up policies (where premiums are no longer paid but coverage remains).
Mera Kal – Facilitating loan against life insurance policy
Loans against insurance policies are an innovative financial solution that allows policyholders to unlock liquidity without jeopardizing their long-term security. We just gave you the list of top 5 life insurance policies in India, that are eligible for a loan against insurance. However, it is necessary to keep in mind that the eligibility for loans and loan amounts may vary depending on the specific insurer and policy type.
At Mera Kal, we are invested in simplifying this process for our customers. Our streamlined approach ensures that you can access funds quickly, with loan terms tailored to your specific life insurance policy. Whether you hold an endowment policy, a ULIP, or any other qualifying plan, our team is here to guide you every step of the way. We also give you the facility of checking your loan eligibility through our loan eligibility calculator, as well as the surrender value of your life insurance policy so that you know how much you might be able to avail as loan – this means we follow transparency in all our processes.
Ready to explore your options? To check your eligibility and discover how your insurance policy can become a powerful financial asset, call us at +91 9901672084 or visit our website and submit your application today.