Loan Against Your Life Insurance Policy – Things to Know

It is common for individuals to save money to meet short-term and long-term expenses. However, it is often the big expenses that come unexpected or suddenly such as medical bills, marriage expenses, higher education fees, property purchase/renovation, etc., that disrupt one’s financial condition. In such cases, people often fall short of the required funds and turn to financial institutions or others for loans. While people with a good credit score and assets can easily get loan approvals, others may not. In any case, becoming debt-ridden during such times is not financially prudent and one can save and plan ahead to avoid such a situation.

If you don’t have assets like gold, properties, etc., to use as collateral but need funds to meet sudden expenses, you can use your life Insurance Policies to get secured loans. In this blog, we explain more about getting a loan against life Insurance policy so you can fulfil all your needs without stress and pressure.

What is Loan against Policy?

As the term suggests, it refers to obtaining a loan against an existing life insurance policy. You use your insurance policy as collateral when you take such loans. Unlike personal loans, life insurance Loans are secured and give security to the lender. Hence, the loan on life insurance Policy typically has a lower interest rate than most personal loans.

The loan amount depends significantly on the policy’s surrender value, premiums paid to date, policy type, and the eligibility of the policy. It is the best option to secure funds if you don’t have any Savings Plans to meet unexpected expenses. So, if you’re wondering, ‘Can I take a loan on my life insurance,’ we recommend checking your policy’s eligibility and the shortlisted lender’s terms and conditions for life insurance Loans.

How to Get a Loan from a Life Insurance Policy?

Not all life insurance Policies are eligible for securing a loan, so start by determining your policy’s eligibility status. You can assess the policy type and check whether your insurance provider or other financial institutions offer loans against the particular policies. For eligible policies, you can contact our team on our toll-free number (1800-103-6116) to get step-wise guidance on how to avail a loan against your existing policy. You can also visit one of our branches for assistance. Use our ‘branch locator’ to find a branch near you. 

The precise application steps may vary from one lender to another, so we recommend checking the particular lender/insurer’s website for accurate step-wise application details. You can also contact the lender’s online customer support executives for more details on how to take a loan from life insurance.

Which Insurance Policies Are Eligible for a Loan?

Endowment Policies, Money-Back Policies, and Whole Life Policies are generally eligible for securing a personal loan against life insurance. If you’re covered under a group health insurance policy, Unit-Linked Insurance Plans (ULIPs), and term insurance plans, then you may not get loans against them. Some insurers may provide insurance against ULIPs, but not all will. Read your policy’s terms and conditions thoroughly and talk to potential lenders/insurers executives to determine whether you can get a loan on life insurance policy. You can assess your Retirement Plans to find existing policies eligible for loans. 

Some Important Points for Loan against Insurance

If you often ask yourself, ‘Can I take a loan on my life insurance?’ The answer is yes. It is a straightforward process, but you must consider the following points before taking out a Loan against life insurance Policy.

• Rate of Interest

The rate of interest varies from one lender to another, but it is comparatively lower than personal loan interest rates. Unless specified in the loan documents, the interest rate remains fixed throughout the loan tenure. We recommend reading the loan’s full terms and conditions for clarity.

• Repayment

Loan on life insurance Policy offers flexible payment terms, but it also attracts severe repercussions on failed payments. The repayment tenure for such loans is generally six months, but it can sometimes be extended until the policy tenure. Individuals can repay the loan in fixed EMIs or as a lump sum at the end of the loan term. Some even pay the interest and get the principal deducted from the policy’s maturity value. You can talk to the lender and choose a loan repayment method that works best for you.

• Loan Amount

Most lenders offer loans up to 80%-90% of the policy’s surrender value, so calculate the loan amount accordingly before applying for any life insurance loans.

• Impact on Policy Benefits

The outstanding loan amount and the accumulated interest will be deducted from the maturity proceeds, lowering your policy returns and safety net. You can prevent it by making timely repayments.  

What are the Documents Required to Avail Loan against Insurance?

If your policy qualifies for securing Life Insurance loans, then you will need the following documents for a smooth loan application process:

• Life insurance policy document
• Duly filled loan application form
• Identity proof (Driver’s license/passport/PAN card/Aadhar card, etc.)
• Address proof (utility bill/rental agreement, etc.) 
• Passport-size photographs
• Assignment of the policy document
• Proof of premium payment
• Bank statement
• Income proof
• Loan agreement

Some lenders may require additional documents.  

The Benefits and Concerns of an Insurance Policy Loan

Many individuals have a basic understanding of what is policy loan in life insurance, yet they don’t have a clear picture. The following benefits and concerns will strengthen the awareness of loans against insurance policies so anyone can proceed with confidence.

Benefits of an Insurance Policy Loan

• Lower Interest Rate

The interest rates on loans against insurance policies vary from one lender to another, but they are comparatively lower than those on most traditional, unsecured bank loans. 

• Less Scrutiny

Since you’re applying for a loan by placing your insurance as collateral, there is less scrutiny involved in the application and approval process.

• Faster Disbursement

Unlike personal loans, the loan disbursal is faster for life insurance Loans. You may receive the loan amount within a few days of approval.

• Higher Approval Chances

Applying for a loan to your existing insurer has minimal chances of rejection, especially if you’ve never defaulted on your premium payments for three consecutive years.

• Flexible Repayment Structures

Getting a loan on life insurance Policy is desirable because it doesn’t have rigid repayment structures. You can choose to pay only the interest during the loan tenure and have the principal deducted from the maturity value. 

Concerns of an Insurance Policy Loan

• Impact on Policy Benefits

If you take a personal loan against life insurance, you may receive a lower maturity value, especially if you default on repayment. This can affect your financial planning and status.

• Interest Accumulation

Failure to repay timely interest can result in hefty interest accumulation. If the interest combined with the principal exceeds the policy’s cash value, the insurer may terminate your policy, stripping you of your coverage benefits.

Personal Loan and Life Insurance Policy

If you’re struggling to choose between a personal loan and a loan against life insurance policy, we recommend understanding the difference between both to make an informed choice.

In a nutshell, obtaining a loan on life insurance policy is a more practical, hassle-free, and faster route to getting funds. Individuals with no assets for collateral can easily secure loans against eligible insurance policies.

What Happens if You Fail to Repay?

Failed repayments will lead to increasing accrued interest over time, significantly reducing the maturity proceeds. If a person dies before repaying the loan and interest amount, the insurer reserves the right to deduct it from the policy’s maturity value before disbursing the balance. The insurer can also terminate the policy if the borrowed loan with interest exceeds the policy’s cash value to recover the dues.

Get Easier Access to Insurance Loans from Shriram Life Insurance

Regardless of their financial planning, anyone may need urgent funds to meet unexpectedly large expenses. In such cases, obtaining a low-interest loan can be the best option. We recommend taking a loan against life insurance policy because it is fast, secure, and comes with flexible repayment terms. Many of the Shriram Life Insurance policies are eligible for securing a loan, like Shriram Life New Shri Vidya, Shriram Life Assured Savings Plan, etc. So, you can consider buying a policy from Shriram Life Insurance for enjoying multiple benefits, like systematic saving, wealth creation, financial security, collateral-free loan, and more. Since every plan has different features, coverage, and benefits, explore relevant plans and invest in the ones that align with your financial goals.