Now, You Can Get A Loan Against All Non-linked Insurance Policies: All You Need To Know
Loans against an insurance policy are secured loans and so their interest rates are lower than that of unsecured personal loans
When you need money, a loan can come in handy. Personal loans are one option but they come with a high rate of interest. Another option is to take a loan against insurance policies. The Insurance Regulatory and Development Authority of India (IRDAI) has recently made some important announcements in respect of such loans.
Previously, some life insurance policies only acquired a cash value after premiums had been paid for two or three years. “The Insurance Regulatory and Development Authority of India (IRDAI) now requires insurers to provide a cash value after just one year's worth of premiums. This means that policies with a cash value after one year are now eligible for loans,” says Syed Meraj Naqvi, CEO and Principal Officer, Riskbirbal Insurance Brokers. So now, all non-linked policies should offer a loan facility.
IRDA has thus mandated insurers to provide loan against all non-linked savings products offering surrender value. “This is going to be beneficial for policyholders planning to use their life insurance policy as collateral for loan,” says Abhishek Kumar, Founder and Chief Investment Advisor at SahajMoney, a financial planning firm.
It is important to remember that not all types of policies offer loans.
Term life insurance (which only pays out upon death, does not have the facility of taking a loan against them. Also market linked Unit Linked Insurance Plans (ULIPS) does not have a loan facility.
“It's important to check with your specific insurer to see if your policy allows loans and what the terms are,” says Naqvi.
How They Work
Most life insurance policies with a cash value allow you to take out a loan against that value. This means the insurer lends you money using your policy's accumulated value as collateral.
Typically, insurers will lend you up to 90 per cent of the surrender value for active policies and 85 per cent for discontinued policies with cash value (paid-up policies).
Interest Rates
“Interest rate in most policies is dependent on 10-year government securities (G-Secs) yield and some margin over that is usually charged,” says Vivek Jain, Head - Investments, Policybazaar.com.
Interest rates on policy loans vary between insurers, typically ranging from 8 per cent to 11 per cent annually.
You have to remember that loans against an insurance policy are secured loans and so their interest rates are lower than that of unsecured personal loans which may range between 11-24 per cent. If your credit score is lower the interest rate will be higher and vice versa.
Repayment Modes
You have several options for repaying a policy loan. “You can pay interest only, along with your regular premiums, on a monthly, quarterly, half-yearly, or yearly basis. The initial interest payment period may be shorter than your premium payment schedule,” says Naqvi.
Also you can make full or partial payments towards the principal amount at any time. The outstanding loan amount will be deducted from your death benefit pay out or your surrender value if you cancel the policy.
Keep In Mind
“All these loans are secured loans hence if one has low credit score and is looking to avail low interest loan quickly they can look at availing it. But one should be mindful that in case of a default in repayment of loans or default in payment of future premiums, the insurance policy will lapse,” says Kumar.
