Why Should One Opt for a Loan Against an Insurance Policy?

The insurance sector has large market value in India, with the industry having seen incredible growth ever since liberalization. In fact, experts predict even higher growth in future. According to India Brand Equity Foundation, the insurance sector will reach the $280 billion mark by 2020!

There are two types of insurance plans to choose from, life policies and non-life covers. The life insurance sector is primarily seen as offering protection for the insured, but lately its role has moved beyond the traditional death benefit to also providing additional benefits, such as tax savings, investment and even a source of credit.

Life insurance policies can now be used as collateral against which loans can be raised. That is to say, you not only get long term benefits from life cover but it also solves your short term financial worries.

Features of Loans Against Insurance Policies

·         Such financing can be obtained only on the cash value of the life insurance policy. This means a loan through this method cannot be raised using a term plan. The acceptable policies are money back, unit linked and other plans where there is an investment angle involved.

·         The amount you can raise through your life cover depends on the value and number of premiums you have paid. The higher, the better is the general rule.

·         Any life plan is only eligible for use as a loan instrument only when it has reached its surrender value stage. This is generally 3 years. This surrender value decides the amount that will be sanctioned as loan. Usually 80%-90% of the surrender value is granted.

·         You are surrendering the rights of your policy to the lender, which the lender can use in case of any payment default.

How Your Policy Can Help

·         Interest Rates: The primary concern while selecting the source of credit is the amount of interest that will accrue. Compared to personal loans, the rates charged here are drastically low.

·         Risk Margin Calls: As opposed to raising credit against gold or shares, the value of the insurance policy remains unchanged. This minimizes margin value risks.

·         No Crunch in Equity: While using other forms of debt instruments, your property, assets or equity can be used as collateral, which then restricts your finances. With insurance policies, you continue to enjoy the benefits from your plan and raise a loan without any liquidity crunch.

·         Easy Processing: These loans are sanctioned in a very short time, generally in about 2-3 days.

Loans against an insurance policy are a safe bet for short term money needs. Just remember, the repayment is done within the policy duration and default in premiums for the policy should be avoided, since the insurance cover itself might be foreclosed by the insurer.