Granting of loans on life insurance policies, with some companies examples like LIC policies, Birla Sun Life insurance policy.
Also it includes pros and cons of taking loans against life insurance policies and on what type of policies people can take loans.
3. Loan Against Life Insurance Policies offers
customers the opportunity to leverage their
existing life insurance policies and generate cash
reserves quickly.
This is a beneficial facet of life insurance, which
helps you liquidate an existing policy to beget
funds for professional or business purposes.
It is pertinent to note that the loan is approved
only against traditional life insurance models
which includes a saving element in them.
4. It is not granted against term insurance.
LAIP for unit linked insurance policies is also
not granted as per IRDA regulations 2012.
Also, not all life insurance plans qualify for
personal loan against insurance policy.
LAIP only for Life Insurance policies that have
attained their surrender value at the time of
application of the loan.
5. Immediate annuity and Deferred Annuity
Policies
Temporary assurance policies
Fixed term marriage endowment or education
endowment plans
CDA policies during deferment period
6.
7. Getting a life insurance policy loan is quick
and easy.
Since you are borrowing against your own
assets, there is no approval process, credit
check or income verification.
Policy loans generally have a much lower
interest rate than bank loans and are devoid
of high fees and closing costs.
In most cases, they are also tax-free.
8. If you were to die before paying back your policy loan,
the loan balance plus interest accrued is taken out of
the death benefit given to your beneficiaries. This could
be a problem if your beneficiaries need the entire
amount of the intended benefit for final expenses.
If the loan balance increases the amount of the cash
value, your policy could lapse and risk termination by
the insurance company.
Borrowing from your cash value may result in the
collateral amount being moved from an investment
account into a secure account. Any dividends earned on
the investment account are decreased based on the
amount of collateral that is secured.
9.
10. Though this feature is available for some policies, a
policyholder should not be dependent on it.
As a good fiscal measure, you should have
minimum six to twelve months of your fixed
monthly commitments like household expenses,
loan EMIs etc. in a fixed deposit or a liquid mutual
fund scheme and this should be a dedicated
emergency fund that can be used in case of an
emergency.
11. The maximum loan value is 90% of the surrender value of the
policy. The insurer requires :-
1. An application by the policy holder for loan
2. An absolute assignment of the policy in favour of the insurer
3. An advance receipt
Each policy will be treated as a separate entity and separate
assignment and application is required.
If the payee is the same a consolidated cheque can be given.
While making the calculations the actual premium paid will be taken
into account.
Amount of subsisting previous loan are deducted and balance
amount is taken as maximum loan.
Arrears of unpaid premiums at the time of calculating the amount
of loan and outstanding interest on any previous loan, if any,
will be deducted
12. I will discuss the loans from context of LIC
New Jeevan Anand, one of the most popular
endowment plans from LIC.
LIC New Jeevan Anand is a participating non-
linked life insurance plan which offers dual
benefit of insurance and investment.
13. How to get personal loan against LIC policy?
Eligibility: In order to be eligible to avail the loan, applicant must
have paid full premium in the last 3 years.
How to apply: There are two ways of application. You can personally
visit LIC branch office or ask your agent to do all the formalities for
you.
Documents required: Very basic documents are needed. You just
need to submit original policy documents, cancelled cheque, ID
proof (PAN card, driving licence, voter ID card, passport, Aadhaar
card etc.).
LIC does not mandate to provide address proof.
How much loan amount you can get:
Applicant will get loan which is equal to 90% of the surrender value
of the policy.
14. The most important benefit of personal loan from
LIC against policy is that the interest rate is very
low compared to the ones offered by various
banks.
The interest rate is 9% whereas banks typically
charge between 16%-24%.
Interest rate is calculated bi-annually i.e. every 6
months
Repayment option is flexible and principal amount
to be paid is upto the policy holder.
15. Online repayment not possible. So every time you will have to
visit respective LIC branch to pay the repayment amount.
Since loan amount depends on the surrender value.
If the debt amount goes above the surrender value then LIC
has rights for termination of the policy. This will impact your
family’s financial security. This is because in your absence,
nominee won’t receive money
16. Aditya Birla Finance approves LAIP only for
Life Insurance policies that have attained their
surrender value at the time of application of
the loan.
It is pertinent to note that the loan is
approved only against traditional life
insurance models that include an endowment
and money back features.
17. Collateral: Life Insurance policies that have
attained surrender value (Surrender value =
amount of money you would get after
terminating the policy after certain allowable
period of time)
Tenure: Up to 1 year
Minimum loan amount: Rs 25 Lakhs
Loan Margin: 10 % to 20% of surrender
value or applicable MF margin for unit linked
NAV based policies.
