How Can Your Insurance Policy Help You Get A Loan
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A life insurance plan is a safe investment option that offers the dual benefit of insurance and investment. To overcome a financial crunch, you can use your life insurance cover or a guaranteed return plan instead of opting for an unsecured loan.
Eligible Policies to Apply for a Loan Against Life Insurance
A loan against insurance policies is only applicable towards a traditional guaranteed return insurance plan. These might include money-back or endowment policies, as these are viewed as a safe investment option by insurance companies to give a loan against.
A guaranteed return investment plan combines insurance with investment. This means that under its insurance component, if the policyholder were to pass away, the nominees receive a death benefit. Additionally, under the investment component of a guaranteed plan, if the policyholder survived the policy tenure, they are paid a maturity benefit. For a policy to be eligible for getting a loan, it must have a surrender value associated with it.
You cannot get a loan against your term insurance. This is because term plans don’t come with a maturity benefit, which is why this life insurance does not make the cut for the list of approved investments for securing a loan. For non-term plans, if your premiums have been paid promptly for three or more years, then a loan can be applied against it.
Undertaking a loan against insurance is like borrowing from yourself, which is why the process for loan application is not stringent. An important clause to bear in mind is that after taking the loan, the policyholder has to continue paying premiums for their guaranteed return plan. The failure to do so might result in a termination of the policy.
Permissible Loan Amount with Loan Against Policy
The approved loan amount needs to be verified by the bank or the insurance provider. It is usually a percentage of the maturity benefit under which the loan can be taken. Against a traditional guaranteed return investment plan, a loan amount of up to 90% can be taken. While ULIPs don’t have a loan against them, if a loan can be undertaken, the loan amount will rely on the current corpus value and the type of fund chosen.
The loan is sanctioned to the lender after the amount is decided. Additionally, since the loan is not an income, it is exempted from taxes.
Conclude
While it is easy to take a loan against your insurance policy, it is important to ensure its timely repayment. This is because investments are made for future financial security, and failure to repay the loan can leave you and your loved ones in a compromising position in the future.
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