Loan Against ULIP Policy

Decoding Loans Against ULIP Policy

When you take a loan against ULIP, the policy is the collateral like other life insurance policies. The amount of loan that you are offered depends upon the then Fund or Surrender Value. What is surrender value? It is the amount paid to the policyholder in case they choose to terminate the policy before its maturity. The eligibility to avail a loan against ULIP policy is usually set by the lender ^[1]. You can check their website and gather the necessary documents to apply for a loan however it is pertinent to note that insurance companies do not provide loan against ULIP Policies.

Why Take Loan Against ULIP?

If ever a need arises for quick cash and you don’t entirely want to dissolve your investment in ULIP policy, a loan against ULIP is a viable option.

Here are some possibilities when you can choose to get a loan against ULIP policy:

Expect The Unexpected

As mentioned earlier, there can be a sudden expense that you hadn’t anticipated. There may be a sudden need for a huge amount of funds, it can be for a car expense, an important appliance repair, an urgent travel requirement or a medical expense^[2]. By applying for a loan against ULIP, you may be able to receive your funds faster compared to other avenues ) whereas your investment (units) in policy remains intact.

Planned Expenses

A loan isn’t only sought when there is an unexpected situation. It can also help in filling the gap between your planned expense and what you are currently saving^[2]. If you had a home renovation planned for years but the damages are beginning to show earlier than expected, you can avail a loan against ULIP and begin the work without hurting your current savings.

The Debt Picture

A loan against ULIP can also be helpful in saving costs when you are paying off debt ^[2].

Safety Net For Entrepreneurs

A business is impacted by multiple factors which are social, political and economic. A business owner can avail a loan against ULIP to tackle cash flow shortage and meet business needs^[2]. The uncertainty of a business may also spring up unexpected expenses at a short notice. A loan against ULIP will help you quickly arrange funds for these expenses without affecting your long-term policy investment.

Things To Consider Before Getting Loan Against ULIP

While availing a loan against ULIP policy, you may want to consider that you will not be receiving the entire surrender value. There is a Loan-To-Surrender Value Ratio that is followed by the lender. . Upon opting for Loan against ULIP Policy you are assigning the policy to the Lender and benefit or payout against policy would be credited to the assignee (lender). However, your exposure is limited to your loan outstanding with lender only^[2].

Frequently Asked Questions

1. What is ULIP and how does it work?

   
   

   Unit Linked Insurance Plan or ULIP is a life insurance plan that has life insurance cover along with market linked investment . The premium paid by the policyholder is used for providing life cover and a part of it is diverted to investment in market linked funds which can be equity, debt or a combination of both. This way a policyholder is able to achieve risk cover and wealth creation from the same place.

   
   

2. What is the advantage of getting a loan against ULIP policy?

   
   

   The interest rate on ULIP changes from lender to lender. It is also a good way to extract money for unplanned expenses without compromising your ongoing policy.

   
   

3. What is fund value in ULIP?

   
   

   Policyholders can choose from a variety of funds for investment after accounting for their risk appetite and the market performance . Fund value is the number of units, which hold monetary worth, owned by the policyholder. To calculate the fund value for any day, the policyholder can multiply net asset value (NAV) of every unit by the number of units held by them.

   
   

4. What is the difference between ULIP and other insurance policies?

   
   

   ULIPs are life insurance plans which offer life cover with a market linked investment component. At Maturity, the policyholder is receives the fund value as on the date of maturity whereas in case of death the sum assured or fund value whichever is higher is paid to the nominee as per the terms of the policy. Moreover, the investments^[3] risks is borne by the policy holders.

   
   

5. Is it safe to invest in ULIPs?

   
   

   ULIPs have a lock in period of 5 years and subject to market volatility, so it is important that you assess your financial capabilities before signing up for for ULIP.

   
   

6. Is ULIP guaranteed* returns?

   
   

   ULIPs are market-linked investment product, which means that your earnings will be based on market performance. Hence, it doesn't offer guaranteed* returns.

   
   

7. Can ULIPs be withdrawn?

   
   

   ULIPs have a lock in period of 5 years, hence, withdrawals can only be made after 5 years upto limits specified in the policy.