Published Article Details

How to take a loan against life insurance policy

Posted by: Girija Gadre on Jan 01, 2018, 06.30 AM IST

Apart from an insurance cover that a life insurance policy provides, it can also be used to secure a loan at a competitive rate. These loans are provided by the insurance company itself or any other NBFC or bank, which provides loans against securities. This facility is, however, not available against term insurance policies or Ulips that invest in equity or equity oriented securities. 

Loan amount

The maximum value of a loan depends upon the type of policy and its surrender value. The amount of loan is typically a percentage of the surrender value of the policy. Loan amount can be as high as 80% to 90% of surrender value in case of traditional money back or endowment insurance policies. Some insurance companies take into consideration about 50% of the total premiums paid to calculate the maximum loan amount. 

Documents 
To avail the loan, a loan application form needs to be filled by the insurance policy holder. The application form must be accompanied with the original insurance policy document. A payment receipt for the loan amount and a copy of a cancelled cheque must also be enclosed with the application. 

Deed of assignment 
The insurance policy needs to be assigned in favour of the lending institution/insurance company as the case may be. The assignment deed needs to be executed by the policyholder in the prescribed format. Assignment details are endorsed on the policy document as well. 

Charges

The insurance company or financing institution may charge a nominal loanprocessing fee for disbursal of the loan. 

Points to note 

  • Interest rates on loan against insurance policy is usually much lesser than a personal loan.
  • If in case the interest due on the loan exceeds the surrender value, the policyholder runs the risk of losing insurance cover.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.) 

This article appeared in Economic Times dated Jan 01, 2018, 06.30 AM IST

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