What is a loan against an insurance policy?
A loan against an insurance policy is a type of secured loan paid by the insurance provider, allowing the policyholder to borrow money against the insurance policy's surrender value1. This loan facility is available in endowment and money-back insurance policies which have a life cover and savings components1. The policyholder can get funds up to 85% to 90% (may varies product to product) of the surrender value of the insurance policy.
A loan against an insurance policy allows you to borrow money against a valuable asset (your insurance policy without harming thelife insurance coverage. The combination of flexible terms and affordable interest rates makes it attractive for policyholders seeking immediate financial assistance1.
What are the Other Loan Options?
As an alternative to a loan against an insurance policy, one can take ordinary commercial loans, such as credit card loans and personal loans, to meet one's financial needs. Such commercial loans creates a debtor and the creditor relationship, in which the borrower is legally bound to pay the loan amount along with interest to the lender as per the stringent repayment schedule2 (Page 251).
1. Personal Loans
Personal loans are unsecured loans offered by financial institutions and banks based on the borrower's creditworthiness. They can be used for several purposes; however, they generally have higher interest rates.
2. Credit Cards
Credit cards also offer a form of unsecured credit but they might have high interest rates3. These are revolving credit options that allow quick access to funds.
To evaluate which is better- a loan against insurance vs other loans, we need to weigh the pros and cons of both.
Comparison between Loan Against Insurance Policy vs Other Loan Options
Here is the tabular representation of the comparison between the loan against the insurance policy and other loan options:
| Particulars | Loan against insurance policy
| Other loan options
|
Rates of Interest
| Generally lower in comparison to the other types of loans1.
| Higher interest rates for personal loans or credit cards compared to loans against policies5.
|
Credit Check
| These loans do not require any credit score or credit check. Individuals with low or no credit score can get loan against insurance policy2(251).
| These loans require extensive credit checks. Individuals should have a good credit score to get the loan2(251).
|
Collateral
| The insurance policy surrender value is the collateral in these loans1
| Personal loans and credit cards are generally unsecured3. However, the lender may ask borrowers for assets as collateral under other loan options like gold loan, loan against property, etc4.
|
Legal Obligation
| The policyholder is not legally obligated to repay the loan. The outstanding loan amount, if unpaid will be deducted from the death benefit pay-out payable to the nominees2(251).
| The borrower is legally obligated to repay the loan as per the repayment schedule2(251).
|
Easy Access and Documentation
| These loans are easily accessible and do not require much information or documents, as the insurer already has your information1.
| These loans are also readily accessible; however, they may require proper documentation as per the lender’s policy3.
|
Benefits of Loan Against Insurance vs Other Loan Options
Loans against insurance policies offer numerous benefits, including flexible repayment tenures, no credit checks required and continued policy benefits whereas the other unsecured loans have stringent repayment schedules and require extensive credit checks1.
Considerations of Loan Against Insurance vs Other loan options
It is necessary to consider the availability of loans against insurance as they are available only on money-back and endowment policies. Term plans and ULIPs plans are not eligible for obtaining a loan against insurance. Further, the policy loan against insurance is limited to a percentage of the surrender value of the policy, i.e. 85-90%5(may vary basis products), and the policyholder has to assign the policy in favour of the insurer as the policy is kept as security for the loan2.
What Happens if You Fail to Pay Back Loan Against Insurance vs Other Loan Options
If the policyholder fails to repay the loan amount and/or the interest, the same would be deducted from the benefit pay-out which reduces the policy benefits. Further, if the total amount of the loan including the outstanding interest, exceeds the surrender value of your insurance policy, it may lead to foreclosure (usually in lapsed or paid-up policies) and cessation of the insurance coverage2 (Page 252)
On the other hand, in case of other loan options, failure to repay the loan and the interest will attract penalty and late fees which can be a percentage of the outstanding dues or a fixed amount as per the terms and conditions of the lender. It can also negatively impact your credit score and lead to potential legal actions.
Choosing The Right Option: Loan Against Insurance Policy vs Other Loan Options
The choice between a loan against an insurance policy and other loan options depends on your financial needs and suitability. If you have a savings-oriented life insurance plan that has acquired a surrender value and can fund the loan that you need, you can choose a loan against your insurance policy and fulfil your financial needs. Easy availability, minimal documentation, lower interest rates and flexible repayments are some factors that work in favour of loans against insurance policies.
On the other hand, if you don’t have a suitable insurance policy to offer the loan facility or if the available loan amount is lower than your financial needs, you can consider other loan options. You might get the funds you need for your financial needs from such options without hassles.
So, assess your needs, the life insurance policy that you have, the loan amount available and then make an informed decision.
Conclusion
In summary, a loan against an insurance policy can be a beneficial financial tool, particularly for individuals having low credit score. However, understanding the pros and cons of each option is crucial to make an informed decision.
Frequently Asked Questions
1. How do you apply for a Loan Against an Insurance Policy?
You can contact your insurer to understand the process to apply for a loan against your insurance policy. Fill up and submit a simple application form along with relevant documents to get the loan against your insurance policy.
2. What is the interest rate of a loan against an insurance policy?
Interest rates can vary for different insurer provider, & depending on the lender's policies and policy’s terms.
3. What are the things I should consider before opting for a loan against an insurance policy?
Some of the things to consider when opting for a loan against insurance policy is the amount of loan available, the applicable rate of interest, your repayment capacity, and the remaining policy tenure.
Reference
BJAZ-WEB-EC-11482/24
An ISO 9001:2015 
