How to secure a loan against your insurance policy: A complete guide

In a recent announcement, the Insurance Regulatory and Development Authority of India (IRDAI) mentioned that all insurance savings products should have a provision of a policy loan feature to assist policyholders during times of financial need.

The IRDAI master circular stated that policyholders have the option of partial withdrawal under pension products to meet their expenses during important life events like higher education, marriage, purchase or construction of residential flats, medical treatments etc.

About loans against insurance policies

This facility allows policyholders to take a loan by pledging their insurance policy as collateral. So far, traditional loan facilities have been eligible for this facility. Only money-back and endowment plans (with savings and life cover elements) were allowed to borrow money against their policies. However, ULIPs and term insurance policies are still not eligible to be used as collaterals.

Eligibility

To obtain a loan against an insurance policy, it must have a surrender value. Generally, the approved loan amount ranges between 85%-90% of the surrender value.

Interest rate and repayment

Loans against insurance policies have better interest rates than secured or personal loans. Because of their lower interest rates, borrowers (policyholders) can save money throughout the tenure of the loan.

Besides, these policy-pledged loans have flexible repayment options. Borrowers can choose to pay only the interest amount if they prefer. This comes as a great help during times of financial constraints. Another key advantage is that borrowers can deduct the loan amount from their insurance claim at the time of settlement. This facility makes repayment easier and borrowers have quicker access to the money they require.

Hence, loans against insurance policies are practical and economical solutions for people looking to borrow money.

How to borrow

Before applying for a loan against an insurance policy, ensure the following:

Eligibility

Before applying for the loan ensure the insurance policy has a surrender value that can be assigned to the lender. This is an important clause to consider. The surrender value is the money you would receive if it is cancelled earlier. This is crucial because it decides how much you can borrow by pledging the policy. The policy should also be assignable to the lender, which means you can transfer the rights of the policy to the lender as collateral for the loan.

Application process

To apply for a loan against your insurance policy, you can either approach the insurance provider from whom the policy has been taken or lending institutions like banks, NBFCs etc. You can inquire at leading institutions and choose the one that offers the best deals.

Sanction and disbursement

Once the eligibility criteria are met, the loan is disbursed, typically about 85-90% of the surrender value of the insurance policy.

These collateral loans are helpful for insurance policyholders in need, saving them hassles and money on interest.