Traditionally, the main function of a life insurance cover has been to safeguard the family's finances in the event of the demise of the breadwinner. Today, however, insurance is not limited to covering risks; it can help in getting a loan. So, not only do you get security, life insurance also comes to your aid when you’re going through a financial emergency.
Several lending institutions provide loan against the surrender value of whole life insurance policies. Term insurance policies, on the other hand, don’t generally acquire a surrender value; hence, it is not possible to avail a loan through this option. Before buying a life insurance plan, make sure to read through the policy documents to understand the terms and conditions associated with it. If the documents state that your policy will only acquire a minimum surrender value when you have paid premiums for at least three years, then you can get a loan only after ensuring premiums are paid for the three years.
How much can be availed?
The loan amount you can take out is a percentage of its surrender value. Usually, loans can be availed up to 80-90% of the surrender value of traditional plans with guaranteed returns. Now, it is important to note that there are two kinds of surrender value – i) special surrender value and ii) guaranteed surrender value. While initially you may find that the difference between the two isn’t much, the special surrender value, after a while, generally becomes greater than the minimum guaranteed surrender value. Loans will be offered on the higher surrender value.
The amount of loan that will be granted also depends on the nature of the policy. Lending institutions usually have a preapproved list of insurance policies against which they provide the loan. The nature of facility that is offered by banks is usually in the form of overdraft facility or demand loan or term loan.
After the loan is sanctioned, all rights on the policy are transferred to the lending institution. A crucial point therefore to be noted is that if the loan is not repaid, your family will not stand to receive the benefits as the lender will have the rights to claim the maturity amount. The loan repayment should be done within the policy term. The insured individual can either choose to pay back the principal along with interest or just the interest amount. In case the individual chooses to repay only the interest, then during the time of settlement, the principal amount due shall get deducted.
In conclusion, consider taking a loan against the surrender value of a life insurance cover if your credit score is low or if the interest on personal loan is high. Also, keep in mind that the loan amount you get may not be a large figure, given that it is a percentage of the surrender value. For any queries on taking a loan against life insurance, write to us in the comments section below or drop us an email on firstname.lastname@example.org.