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Loan facility for life insurance plans: Know procedure to borrow funds against your policy

The Insurance Regulatory and Development Authority of India (Irdai) recently declared that all life insurance savings products should offer a policy loan feature to assist policyholders with their financial needs.

The master circular stated the facility of partial withdrawal under pension products is allowed enabling the policyholders to meet their specific financial needs for important life events like higher education or marriage of children; purchase/ construction of residential house/flat; medical expenses, and treatment of critical illness.

“This is an important step in the series of reforms taken up by the insurance regulator with the interests of the policyholders at the core. A conducive environment is now facilitated to spur innovation, and enhance customer experience and satisfaction,” Irdai said.

The circular also allowed partial withdrawals under pension products.

Loans against insurance policies

A loan against an insurance policy allows policyholders to borrow money by pledging their insurance policy as collateral. Till now, this facility is available for traditional insurance policies, such as money back and endowment plans, which incorporate both savings and life cover elements. It is important to note that unit-linked insurance plans (ULIPs) and term insurance policies are typically not accepted as collateral for these types of loans.

 

Loan amount and who is eligible

To qualify for a loan using an insurance policy, the policy needs to have a surrender value. Typically, the approved loan amount falls between 85% and 90% of the policy’s surrender value.

Interest rate on loans and repayment

Loans taken out against insurance policies often have more favorable terms compared to other types of secured loans or personal loans. The interest rates are typically lower, which means borrowers can save money on interest payments over the life of the loan.

Additionally, the repayment tenures are flexible, giving borrowers the option to make interest-only payments if needed.

Another benefit of these types of loans is that borrowers have the option to deduct the loan amount from the insurance claim when it is settled. This can help alleviate the burden of repayment and make it easier for borrowers to access the funds they need. Overall, loans against insurance policies can be a cost-effective and convenient option for those in need of financing.

How to borrow the loan amount

Before applying for loans, you just consider the following points:

Eligibility: You must see that policy has a surrender value and can be assigned in favour of the lender. This clause you should take while opting for the policy.

Application process: Contact the insurance company or a bank that provides loans secured by insurance policies. Key institutions such as LIC, HDFC Bank, and State Bank of India (SBI) offer such services.

Sanction and disbursement: Once the application is approved, the loan amount, typically 85% to 90% of the surrender value, will be disbursed.

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