What is Loan Against Insurance Policy and How to Get It?

Some insurance plans provide special loan options that allow you to borrow money from the insurance company during emergencies. This optional policy benefit can be of great help when you need in-hand cash during a financial pinch. The option of getting a loan via your life insurance policy is generally known as taking a ‘loan against insurance policy’. 

What is Loan Against Life Insurance Policy? 

All life insurance policies provide financial security for your loved ones in case of your absence. But Savings Plans/Endowment Plans and Unit Linked Insurance Plans (ULIPs) are types of insurance policies that provide financial help even while you are still alive. Savings plans/ULIPs offer returns in the form of survival or maturity benefits. Moreover, your savings insurance plan will accrue a ‘cash value’ (or surrender value) over time. When a plan offers a ‘loan against policy’ option, you are actually taking a loan against this accrued cash value. You will receive a lumpsum amount through the policy for a reasonable rate of interest. 

How Does a Loan Against Policy Work? 

Savings plans use one part of your premium to pay for your life cover, while the other part is invested to create for a savings corpus for your future. As the years go on, this savings corpus will grow in value. This saved amount is known as the cash value of your insurance plan. Some insurance plans even allow you to directly withdraw money from your cash value after a few years. 

However, most savings plan only give back this saved amount upon reaching term end as a maturity benefit. While the cash value is technically your savings, it is generally invested into bonds and other market funds and cannot be easily pulled out by the insurance company.    

But insurers understand that financial emergencies can strike at any time. We cannot always be prepared for every possibility. This is why some insurance policies, such as Edelweiss Life- Premier Guaranteed STAR, offer loan facilities for emergencies. When you take a loan on your policy, you receive a part of the cash value as a lumpsum payment. You are free to use this money however you want. 

Do All Insurance Plans Have a Loan Against Policy Option? 

No, generally loan options are only provided in savings plans and whole life insurance plans. Your policy’s terms and conditions will clearly mention if a loan option is available. If no loan option is mentioned, then it is unlikely that the insurance company will allow you to borrow money against your policy. Note that you cannot instantly take out a loan after buying an insurance policy. Your policy first needs to get a ‘cash value’, which can take a minimum of three years. Your loan amount will be around 85-90% of your policy’s current cash value. 

Benefits of Taking a Loan on Policy 

Below are some of the key benefits of taking a loan on your insurance policy: 

• Quick access to cash- Taking a loan from a bank can be a difficult process. Moreover, your loan request might even get denied based on your current income and liabilities. A policy loan, on the other hand, if granted to you quickly and with minimum hassle. If you need quick access to cash and are struggling to get a loan, then a loan on your policy might be the best course of action. 

• Rate of interest might be lower- Interest rates for loans keep fluctuating. If you are unable to find a loan with a reasonable rate of interest, then consider opting for a loan on your insurance policy. 

• Avoid policy lapse- Unable to pay your premiums? Don’t let your policy lapse! Consider getting a loan on your policy to pay for your premiums. Remember that premium payments need to be made within 15-30 days (depending on your policy’s grace period) of the deadline, and failure to do so leads to your policy getting lapsed. A policy loan will help you keep your plan active, and you can then pay back the loan in the next income cycle. 

Eligibility for Loan Against Life Insurance Policy 

Note that even if your life insurance plan has a loan against policy option, you need to meet certain requirements before you can utilize the loan option: 

Minimum Policy Years: You cannot take a loan against your policy on the very first policy year. Most plans that offer loan on policy require a waiting period of at least 2-3 policy years. Read your policy document carefully to know your policy’s requirements.  

Minimum Surrender Value: Since you are technically getting a loan against your policy’s surrender value, you cannot avail of the loan option if your policy hasn’t accrued a surrender value. Moreover, some insurance plans may also have a minimum surrender value clause, meaning that you cannot get a loan if your current surrender value is below the prescribed limit.  

Policy Status: You can only get a loan on policy if your policy is still active. A lapsed policy cannot be used as loan collateral. So, if you wish to get a loan on your policy, ensure that you pay all your premiums on time. Keep a track of your policy’s status to avoid lapsing on your premium payments.  

Documents Required to Avail Loan Against Insurance: Additionally, you will also need to submit certain documents to verify your identity and your policy status. Some of the documents you will require include- 

• Identity Proof- Aadhar, PAN, or Voter ID 

• Address Proof- Aadhar Card or Driving License 

• Bank account details including your revenue and expenditure for the past six months 

• The policy document that you received during the inception of your life insurance plan 

Things to Keep in Mind for Availing a Loan against Insurance Policy  

No loan on Policy for Term Insurance Plans 

Term insurance plans generally have no savings element whatsoever, and purely provide life cover in exchange for premium. This is why most term insurance plans cannot be borrowed against. However, some term plans do offer surrender benefits, meaning that you will get back some money if you cancel your policy before the term end. For example, Edelweiss Life- Zindagi Protect offers the Special Exit Benefit that lets you reclaim your premiums paid if you cancel the policy after a specific number of years. 

Keep in mind that a surrender benefit is not at all the same as a policy loan, as you will be cancelling your policy and will no longer be protected by life cover. 

Rate of Interest for Policy loans 

The rate of interest for policy loans depends completely on your policy’s terms and conditions. On average, the interest rate for a loan against policy is around 10-15% per annum. This interest rate will be determined by the insurer when you opt to take a loan against your policy. 

Collateral for a Policy Loan 

The salient feature of every insurance policy is the life cover/death benefit it provides. When you take a loan on policy, you get the cash value in hand and your death benefit amount is used as collateral. If you pass away without repaying the loan, then the loan amount plus interest will be deducted from the death benefit payout to your family. So, ensure that you repay your policy loan as soon as possible to avoid putting your loved ones in financial jeopardy in the future. 

Are Insurance Policy Loans Defaultable? 

Loans taken on insurance policies generally do not have a time limit. This means that you can pay back the loan at your own pace. However, keep in mind that you have ultimately taken out a loan, and all loans incur interest. If your delay your loan repayment for too long, then the interest incurred may surpass your death benefit, in which case your policy will lapse.   

Conclusion 

Loan on policy is a great way to access liquid funds during times of financial turbulence. Moreover, getting a loan on your insurance policy is easier than getting a personal loan, and it is also safer for your credit rating. However, this option should only be used as a last resort, as defaulting on a policy loan will terminate your life insurance plan. Remember that you can get a loan on policy via most savings plans, like Edelweiss Life- Premier Guaranteed STAR. 

FAQs 

How long does it take to get the loan amount in your account?    

For loans on life insurance policies, the loan amount is generally credited to your bank account within 2-3 working days post the loan’s approval.  

Does availing a loan against my life insurance policy affect my credit score? 

No, a loan on your policy will usually not affect your credit score. A loan against your policy is a secured loan, as you are using your own policy as collateral. Upon default, your policy will be terminated but your credit score will remain unchanged.  

Are there any processing fees to avail Loan Against Insurance Policy? 

Yes, there can be a processing fee on your policy loan. The fee can differ based on your life insurance provider’s term and conditions. The processing fee can be a fixed amount deductible from your surrender value, or it can be around 1-3% of your total loan amount.  

How do I repay the loan on my life insurance policy? 

The terms of loan repayment are usually set by the insurance provider. Some insurance providers require regular instalments in the form of EMI, while others give you the option of repaying the loan as a lumpsum. You can also repay your full loan amount before the due date if you have the funds to do so.  

How much loan can I get against life insurance policy? 

Your policy loan amount will depend on your policy’s accrued surrender value. The loan amount can be anywhere from 50% to 100% of your total surrender value. Your loan amount can never exceed your policy’s accrued surrender value.   

Neha Panchal - Financial Content Writer 

Neha used to be an Engineer by Profession and Writer by passion, which is until she started pursuing full-time writing. She's presently working as a Financial Content Writer, with a keen interest in all things related to the Insurance Sector.