Loan Against Life Insurance: Things to Keep in Mind

Life insurance policies are primarily meant to provide protective cover to the investors. However, lately, lenders are offering loans against life insurance premiums too. These are becoming popular because they usually come with lower interest rates in comparison to standard personal loans. Moreover, the rates don’t change with market fluctuations as in the case with shares or gold.

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Eligibility Criteria

It’s important to know that not all insurance policies qualify for loans. For instance, in most cases, you won’t be able to get a loan with term insurance. This is because this type of insurance expires at a certain point (the end of the term) but doesn’t offer any returns.

You must also have paid the premiums for your insurance for at least 3 years to qualify for a loan.

Loan Amount and Interest Rate

The maximum loan amount is calculated on the basis of the surrender value of your insurance. Usually, you can obtain as much as 85% to 90% of the same. In case you are able to get a loan with a unit-linked policy, the amount will depend on the corpus and the fund type.

The interest rate on a loan against insurance depends on the amount of premium you have paid and the number of premiums paid so far. The more premiums you have paid, the lower the interest rate is likely to be.

Generally speaking, the interest rate varies between 10% to 14% depending on the loan term and insurance type.

How to Apply?

The process for a loan against insurance varies from one insurer to another. So, you have to contact your insurer to inquire about the process and the documents required. Usually, you would need to fill out a form and attach the original insurance policy. In addition to that, you have to sign a deed of assignment as well.