Policy Loan | Loan against Insurance policies is a good option

Loan against insurance policies is a good option

Loan against insurance policies is a good option in case funds are required in an emergency situation and can be a better alternative to a personal loan or a credit card loan or asking friends/relatives for financial help. But are they always a good idea?

How to obtain a loan against policy

You’ll have to visit the branch of your preferred insurance company and fill the standardised application form for a loan.

In the form, you’ll be asked to assign the policy absolutely in favour of the insurer. This essentially means that in case of a claim/maturity benefit due, the insurer will have the first right over the money and will repay you after deducting the outstanding loan principal and interest. Since nowadays insurers have stopped issuing cheques, you’ll have to also provide a cancelled cheque of the bank account in which you want the loan amount to be credited by the insurer and sign a receipt for the same.

Is a loan available for all insurance policies?

As per IRDA’s guidelines on Linked Insurance products, Unit Linked Insurance Plans can no longer offer a policy loan. So, as on date, this feature is generally available only for traditional non-linked endowment based policies wherein after you pay premium for a certain number of years (usually three), the policy acquires a surrender value. The loan amount is a percentage of that surrender value (usually around 60- 80%).

Hence, if you are contemplating a loan against insurance policy, you need to first check whether your policy is eligible for a loan or not. For this, you can read the fine print but the better option is to visit the branch to know the surrender value of the policy and how much loan can be obtained against it.

Apart from getting a loan, this feature can also enable the policy to serve as collateral for some other loan. E.g. imagine a situation wherein you are purchasing a flat and need a fixed amount for the down-payment but are falling short by a couple of lacs. In such a case, you can assign the policy to the bank or Non-Banking Financial Company (NBFC) providing the home loan.

To know more about Policy Loan there are blog where you can get information