A loan against life insurance policy not only provides financial protection but can also serve as a valuable resource in times of financial need. A loan against your life insurance policy allows you to access funds without losing the benefits of your policy. However, many individuals surrender their policies to meet urgent financial requirements, unaware of the long-term consequences.
In India, policy surrenders remain a significant concern, with a persistency ratio drop beyond the initial years. As per the Insurance Regulatory and Development Authority of India’s (IRDAI) Annual Report 2022-23, ~INR 1.98 lakh crore worth of policies were surrendered and withdrawn in FY ’23. The persistency ratio of the top life insurers in India is nearly 50% after the first five years. This indicates that many policyholders in search of liquidity are surrendering their policies prematurely, or policies are lapsed, thus often missing out on long-term benefits.
Surrender of policies – the drawbacks explained
At times it might look like a good idea to surrender policies that you had taken as investments, or probably life-cover, especially when there is an emergent need of money. But you might change your mind, if you look at these side-effects that come with surrendering your life insurance policy -
- Loss of Protection: Surrendering a life insurance policy cancels the coverage, leaving your family financially vulnerable.
- Financial Disadvantage: The surrender value, especially in the early years of the policy, is often much lower than the total premiums paid, resulting in a significant financial loss.
- Tax Implications: Surrender proceeds may attract taxes, depending on the policy type and duration, further reducing the net amount received. It is important to understand the tax implication on surrender. For example,
- For traditional policies, if premiums are not paid regularly during the first two years of the policy tenure, the surrender value is not eligible for tax exemption.
- For ULIP policies, the surrender amount is tax-free under Section 10(10D) if the policy meets the required conditions. However, if the policy does not qualify under Section 10(10D)—such as being surrendered within the lock-in period—it becomes taxable as per the provisions of the Income Tax Act, 1961.
- Forfeiture of Long-Term Benefits: Many policies, particularly endowment and whole life plans, offer higher pay-outs or bonuses if held till maturity. Surrendering forfeits these potential gains.
The advantages of taking a loan against life insurance policy
At Mera Kal, we believe that loan against insurance policy is one of the best options that you can go for when you wish to avail a loan quicker, easier and without having to give up on your policy benefits. Here’s why loan against life insurance is good idea -
- Retain Insurance Coverage: By taking a loan, you continue to enjoy the benefits of the policy while meeting immediate financial needs.
- Lower Interest Rates: Loans against life insurance policies typically have more favorable interest rates compared to unsecured loans like personal loans or credit card debt.
- No Need for Credit Scores or Income Proof: Since the policy acts as collateral, there’s no need for extensive credit evaluations, making the process faster and simpler.
- Access to Flexible Terms: Loans against policies often come with flexible repayment terms and minimal restrictions, offering greater convenience.
Getting loan against insurance policy with Mera Kal is easier than you think!
Unlock the financial potential of your life insurance policy with loan eligibility calculator at Mera Kal. This intuitive tool simplifies the process, helping you make informed choices without hassle.
Here’s how it works:
- Choose your policy from the list. If you are unable to find your policy listed, reach out to us and we will help you.
- Enter your policy details
- View instant insights - Get an estimate of your policy’s surrender value and download a detailed report. This report showcases the financial impact of surrendering your policy versus taking a loan against it.
Let’s understand the personalized analysis by Mera Kal using an example
Sunita Rao, a 38-year-old working professional, holds the LIC Jeevan Labh Policy - Plan 836, which she purchased in 2016. Recently, she found herself in need of financial assistance for a family emergency. Instead of surrendering her policy, she decided to explore the option of taking a loan against her policy. Here's how her loan eligibility and benefits would be calculated on our Loan Eligibility Calculator.
Sunita’s Policy Details
Policy Name: LIC Jeevan Labh - Plan 836
Basic Sum Assured: ₹500,000/-
Premium: ₹6,869/-
Frequency: Quarterly
Policy Start Date: July 28, 2016
Policy Term: 21 years
Premium Paying Term: 15 years
Based on Sunita's consistent premium payments and the policy’s surrender value accumulation, she is eligible for a loan.
Loan Eligibility
Sunita’s estimated loan eligibility was calculated at 85% of the policy’s surrender value. Let’s break this down:
Estimated Surrender Value: ₹147,058
Loan Amount: ₹125,000 (at 85% of surrender value)
Now let’s break-down the details of the loan
Loan Details
Loan Amount: ₹125,000
Interest Rate: 10% – 12% (depending on the lender)
Tenure: 3 years
Monthly Repayment: ₹4,034 *
Total Repayment: ₹145,203
Total Interest Paid: ₹20,203
(*Note: The actual repayment and interest rate are subject to final sanction by the lender.)
Why loan against life insurance is better than surrendering
Surrender Value Loss Calculation
Based on estimates, if Sunita chooses to surrender her policy today, she will receive only the current surrender value of ₹147,058/- and would stand to lose ₹256,501/-.
Also, by surrendering, she would forfeit the long-term benefits of her policy, including:
Maturity Benefits: ₹5,00,000 (basic sum assured)
Accrued Bonuses: ₹2,50,000 (estimated bonuses accumulated over the policy term).
By surrendering, Sunita would lose in future:
₹5,00,000 (sum assured) + ₹2,50,000 (bonuses) - ₹1,47,058 (surrender value) = ₹6,02,942
Net Benefit with Loan
By taking a loan instead: Sunita retains her policy and its benefits, including the life cover.
Make a Smarter Choice - With a clear analysis of the risks and benefits, you’ll see why a loan is often a smarter alternative to surrendering your policy. Our report highlights how you can retain your coverage while meeting your financial needs.
How to choose the right lender for loan against insurance policy
When opting for a loan against a life insurance policy, it’s important to choose the right lender. Consider the following:
- Interest rates: Look for competitive rates that make repayment manageable.
- Repayment flexibility: Opt for lenders offering flexible terms that align with your financial situation.
- Transparency and support: A reliable lender should offer clear communication and efficient customer service while also ensuring regulatory compliance.
At Mera Kal, we understand the value of your life insurance policy and the importance of retaining its benefits. As your trusted Loan Service Provider for policy loans, we are partnered with lenders who practice transparent loan processes, offer competitive rates, and expert guidance. With our Surrender Value Calculator and Life Insurance Loan Eligibility Checker, we help you navigate the decision-making process on your policy loan and help secure your financial future.
Choosing a loan against a life insurance policy is a smarter alternative to surrendering it. It preserves your policy benefits while providing the funds you need. By partnering with a reliable service like Mera Kal, you can maximize your policy's value and ensure financial stability for you and your family. Start your journey today and explore the options tailored to your needs.