Loan Against Life Insurance

A life insurance policy is a versatile investment option today. It not only provides protection cover but also gives an insured the benefit of availing a loan against the policy. A lower rate of interest is charged in comparison to a personal loan for loans against life insurance policy. Further, the policy value remains unchanged.

However, you must bear in mind the following factors before buying a loan against life insurance policy:

Are you eligible?

Not all life insurance policies provide a loan. You will be allowed to take a loan against the surrender value of permanent or whole life insurance but not against term insurance plan. Further, only upon timely payment of premiums for at least three years that you can avail a loan in case of non-term plans.

While you may not have to go through intense scrutiny while availing a loan on your own policy and your income too does not really come under question, your credit ratings might be considered.

Amount of loan

You will have to check with the company on the amount of loan you are eligible for. The loan amount is a percentage of its surrender value. It can be upto 85-90% against traditional insurance plans with guaranteed returns. For ULIP plans, loan amount will depend on the current value of the corpus and the type of fund.

However, this loan amount is not considered as an income and is very much taxable.

Rate of interest

The interest rate charged is based on the premium that has already been paid and the number of premiums. The more the amount and number of premiums, the rate of interest will be lower.

Documentation

Only your insurance company can guide you on the kinds of documentation required for availing loans. A form will have to be filled, and the original insurance policy will need to be submitted. You may have to sign a deed of assignment. The policy acts as collateral till the loan is repaid.

Premiums

You will continue to pay premiums even after availing loan.

Loan repayment

The loan needs to be repaid during the term of the policy. You can either pay back the principal along with interest or only the interest amount. If one pays only interest, at the time of settlement, the due principal amount will be deducted from the claim amount. Further, in the event of your death during the loan term, the pending amount due will be deducted from the claim amount. So your nominee will receive only the remaining amount and not the full sum assured.

Therefore, it is important to pay back the loan on time or else the interest keeps adding to the balance. This can lead to loan amount exceeding the policy's cash value, thereby causing the policy to lapse. This could lead to payment of taxes on cash value . In case of non-payment of the loan, the loan amount will be taken from the accumulated surrender value of the policy and your policy will be terminated.

HDFC Life offers various term insurance plans for the exclusive financial benefits of your loved ones. For details, click on the mentioned link: https://www.hdfclife.com/term-insurance-plans.