Whileplanning their finances, most individuals have twokey long-term goals- building a corpus for retirement and creating a safety net for their loved ones in case of their sudden demise. Life insurance plays an important role in protecting the financial future of your family in your absence. What is life insurance? A life insurance policy is a legal agreement between the policyholder and the life insurance company. According to the contract, the policyholder agrees to pay premiums for getting a life cover. In case the policyholder is no more, the nominee they had selected will receive the death benefit of the life policy. Some life insurance plans have a saving/investment component to them wherein, when the policy matures, you receive a lump sum amount as a return on investment.
Apart from providing life cover, a life insurance policy can prove to be of great help during times of emergency. If you urgently need funds and are considering taking a personal loan, an alternative would be to take a loan against your base insurance policy. It is a straightforward process and provides an advantage to you over traditional loans.
Here are some questions you need to ask before taking a loan against your life insurance policy:
Is your policy eligible?
The first step when you are considering taking a loan against your life insurance is to ensure whether you can take a loan against your life insurance or not. All life insurance plans do not have this benefit. You can take a loan on your insurance policy if you have a permanent type of life insurance. However, you cannot take a loan against temporary types of life insurance,such as a term plan. Term plans do not have any cash value, and when the policy expires, the term ends, providing no returns.
An insurance company will give you a go-ahead for taking a loan if the records reflect that you have paid premiums consistently for at least three consecutive years. When you are taking a loan on your life insurance, it is like using your own money. Hence, the loan process is not stringent. While your income is not a key factor in eligibility, your overall creditworthiness plays an important role.
What loan amount can you get?
You need to check with your insurance company or the bank to find out what loan amount you are eligible to apply for. A percentage of the surrender value of your policy is the loan amount against life insurance. Usually, with traditional life insurances, you can get a loan of up to 85%-90% of your surrender value. All ULIPs do not have a loan facility, and if your ULIP does, the loan amount will depend upon the current value of your funds and the type of fund you have selected. Once your loan amount is decided, the lender will be assigned the policy, and the lender will hold all rights to the policy.
What documents do you need?
When you decide to take a loan on your life insurance, contact your insurance company and understand how to go about the process. Enquire about the documents you will need for getting a loan. You will be required to fill out a pre-prescribed form and will have to submit your original policy. Also, you may have to sign a deed that states that the insurer has assigned the benefits of your policy to the lender until the duration of your loan. Your policy acts as collateral against which you are taking a loan.
What are the premiums and interest charges?
When you take a loan against your life insurance policy, the interest rate will depend upon the number of premiums you have already paid and the number of premiums you are left to pay. The more premiums you have paid, the lower your rate of interest will be. Banks link the rate of interest with their base rate for most instances. Usually, taking a loan from the bank can be more expensive than borrowing from the insurance company. When you have taken a loan against your life insurance, you need to make payments on premiums just the way you used to. Use a life insurance premium calculator to get an estimate on your premiums. If you cannot pay premiums, the insurance company may end your policy.
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