Should you borrow money from a life insurance policy?

You should know that not all life insurance policies can help you with loan facility. Karthik Raman, Head of Products at Ageas Federal Life Insurance, said: “You can usually take out a loan on life insurance policies that have a cash value at maturity. Traditional savings policies with and without participation provide a loan against your policy. In the case of a participating policy, the insurer shares the profits with the insured in the form of premiums and dividends. Whereas with a non-participating policy, you get benefits at maturity, and the insurer does not share any form of bonus or dividends with the policyholder. Policies that can provide loan facility include refund, endowment, or whole life insurance policies. Raman said, “Since term plans have no cash value at maturity, you cannot borrow against such policies.”

Additionally, you may also not qualify for a loan against unit linked insurance policies (ULIPS). Sunil Sharma, Chief Actuary and Chief Risk Officer of Kotak Life Insurance, said: “ULIPS allows the policyholder to take a partial withdrawal rather than a loan.” Readers should note that cash value policies and ULIPs mix insurance and investment. Although you can borrow against them, mixing investment and insurance is generally not advisable.

Need loan: You might consider taking out a loan against your life insurance policy when you might need a large sum of money urgently. For example, you might need money for an upcoming wedding, making a down payment on the house, repaying a creditor, a medical requirement, etc. Lenders can help you provide a loan amount equal to up to 90% of the buyback. value of your policy. When applying for a loan, you must submit a loan application form, an insurance policy and a signed agreement to the lender. This way, you can take out a loan from a lender using the cash value portion of your policy as collateral.

“The loan amount available would be a percentage of the applicable policy cash value at the time the loan was taken out. Typically, the policy acquires cash value at least three years after inception and becomes eligible for you to take out a loan. There would also be an applicable interest rate on your loan, usually tied to a standard interest rate,” Raman said.

Term of the loan : The term of the loan cannot exceed the maturity date of the policy. Typically, the lender assigns a loan term equal to the term of the policy.

How to refund: You can repay the loan in equivalent monthly installments (EMI) in part or in full at any time before the policy matures. Repayment terms may vary from lender to lender. Also, you must pay all dues before the end of the contract and check if the lender applies prepayment charges.

When paying loan EMIs, you will also be required to pay all premiums on time during the term of the policy so that the policy does not lapse. Ashwini Bondale, Senior Vice President, ICICI Prudential Life Insurance, said: “If you cannot repay the loan, the life insurer/lenders will offset the outstanding loan amount against the maturity benefit or value redemption, as the case may be. In cases where the outstanding amount of the loan exceeds the cash value of the policy, the insurer may seize the policy.”

However, if the policyholder has paid all premiums due, the policy cannot be seized. Sharma said: “For such policies, the amount paid at death or at maturity will be the death benefit or the guaranteed amount at maturity reduced by the outstanding loan amount, respectively.”

Charges: When you take out a loan against a lender’s policy, you will have to pay an interest rate between 10% and 15%. The lender may also charge a processing fee of up to ₹2000 (including GST), foreclosure or prepayment and bounce fee. In addition, lenders may apply penalty interest (around 2%) and annual maintenance fees.

Should I borrow? Borrowing money from a life insurance policy has advantages such as reasonable interest rate compared to personal loan interest rate, faster approval process and no fixed installments for repayment of the loan. Sharma said: “The benefit of a policy loan is that it helps the policyholder fund their immediate cash needs while keeping the life insurance policy in force. However, you should consider policy loans as a temporary option for obtaining cash. Moreover, you must pay it back as soon as the excess money is available to reap the initial benefit of the policy.”

Adding to this, Bondale said: “Loans against policies are available to policyholders at competitive interest rates compared to other avenues of seeking loans.” However, Raman said: “If you have borrowed money against your life insurance policy, then in the event of your unfortunate death, the insurer will deduct the amount of the unpaid loan from the death benefit due to your beneficiaries. “Your beneficiaries will therefore only receive a partial death benefit that is due to them. Another risk is that the contract will automatically terminate if the amount of the unpaid loan with accrued interest exceeds the surrender value of the policy.” remember that on redemption, the contract ends and, in this case, you cannot benefit from the insurance cover.

Point to note: In an emergency, you should consider looking for other financial instruments to raise funds, as a life insurance policy only serves to financially secure your family in the unfortunate event of your death.