Life Insurances 261 views
When it comes to life insurance, it would not be wrong to say that initially its main function was to give the protective cover to one and all. But, nowadays life insurance has become a far more versatile investment option as it gives an opportunity to all the policyholders so as to avail a loan against the policy. Yes, not only it offers the security, but it also helps you in the situation of cash crunch. Well, what's more you can ask for!
These days, taking loan against life insurance policy has become a popular choice for many customers as low interest rate is charged as compared to personal loan. Moreover, one additional benefit is the fact that the policy value does not change with the market which happens in the case of loans against gold or shares.
But, before taking the loan against life insurance, there are numbers of factors that you always need to keep in mind. So, if you are also willing to take this sort of loan, bear in mind these factors.
Eligibility of Policy
The first and foremost thing that you need to keep in mind is the fact that not all life insurance policies make you avail loan. So, first you need to confirm that whether your policy is eligible to offer you the loan or not? If yes, you can take a loan against the surrender value of whole or permanent life insurance, but not against the term insurance. Yes, because unlike other plans, the term plans do not persist the cash value, and they expire at the end of the term without even earning the returns, thus here comes the limitations.
Whereas as far as non-term plans are concerned, if you have paid the premiums for at least 3 years and that too on time, you may avail the loan against your policy.
When it comes to borrowing against your life insurance policy, you are actually borrowing from yourself. Moreover, you can thus get the fund/money for any kind of expense with no need of giving the explanation. Also, you don't have to undergo the intense scrutiny or a stringent process of approval for this. In fact, one thing that needs to be mentioned here is the fact that the income of the borrower is also not a deciding factor when it comes to deciding the eligibility.
It is important to check with your life insurance company or the bank, the loan amount you are eligible for. Actually the loan amount is a percentage of its surrender value. More to the point, as far as loans are concerned, they can be up to 85%-90% against the traditional plans with the guaranteed returns. However, one thing that needs to be mentioned here is the fact that not all unit-linked policies give the facility to avail the loan, but even if they offer, you loan amount depends upon the current value of the corpus along with the type of the fund.
Once you are done with the loan amount, the policy is assigned to the lender. Well, this means that all the rights of the policy are transferred to the lender now, and the loan is then sanctioned to the borrower. Moreover, since the loan amount is not recognized as income by the Income Tax Authorities, thus it is not taxable.
When it comes to interest rate, it is charged on the already paid premium along with the number of premiums that have been paid. Moreover, the more premium amount and number of premium paid, it would not be wrong to say that the lower rate of interest you will be charged with.
Well, in most of the cases, the banks link rate of interest with their base rate. However, as banks consider such type of loans like an overdraft facility against the pledging of the insurance policy, thus it can be more costly as compared to the loans being offered by insurance companies. Usually banks charge the rate of interest between 10%-14%, depending on the type of insurance, and loan tenure.
Such as: Life Insurance Corporation of India (LIC) is currently offering a rate of interest of 9% that needs to be paid half-yearly. It has a minimum tenure of 6 months, so even if you are willing to pay the loan before 6 months, you have no other option to pay the interest for 6 months.
As far as documentation is concerned, the policyholder have to get in touch with the insurance company so as to enquire about the process along with needful documents. Moreover, one pre-prescribed form needs to be filled, and the original insurance policy have to be submitted. Not only this, in fact the policyholder also have to sign a deed of assignment which describes the benefits of the policy are now assigned to the lender during the tenure of the loan. And, this policy will act like a collateral till the time loan is repaid.
When you take a loan against your life insurance policy, the policyholder needs to continue paying the premiums. However, in the situation of the unfortunate demise of the policyholder, many insurance companies providers terminate the policy.
The loan should be repaid during the term of the life insurance policy. Moreover, the policyholder is left with the option of either paying back the principal along with the interest or only the interest amount. However, if only interest is paid, the due principal amount will be deducted from the claim amount at the time of settlement.
In addition to, if a policyholder prefers to pay back only the interest in the event of death during the loan term, the due of the pending amount will be deducted from the claim amount, and what remains will only be paid to the nominee. However, you should always keep in mind that the dependents of the policyholder are not the sole beneficiaries of the policy, in case of the unfortunate death of the policyholder before repaying the loan. Thus, policyholder should be carefully before taking the loan against the life insurance as it will not give the benefits to your loved ones after your unfortunate demise. By using the life insurance policy in order to take the loan, the nominees of the policy might be deprived of this benefit.
Moreover, it is thus prudent to pay back the loan in a timely manner because the interest keeps on increasing,and added to the balance whether the loan is repaid or not. And, this thing increases the risk of the loan amount, thus exceeding the cash value of the life insurance policy which further cause the policy to lapse. Thus, in such cases, the taxes might have to be paid on the cash value. Whereas in the case of non-payment, the owned loan amount will be taken from the accumulated surrender value of the policy, and at last the life insurance policy will be terminated.