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If one has a life insurance policy, one can take a loan against it from the insurance company. The amount depends on the type of policy and the period for which the policy has been in force. The interest charged, which is available at a lower rate, the period of the loan and the terms of repayment are decided by the insurer. The loan is a percentage of its surrender value. In the case of traditional policies, the proportion of the surrender value available as loan may be as high as 90%. If an insurance company provides a loan against Ulips, the value will depend on the type of fund.
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Loan application
The application has to be made by the policyholder in the format prescribed by the insurance company. The details of the policy, the policyholder and the loan applied for have to be provided in the form.
Assignment
The policy against which the loan is taken will be assigned to the insurance company as a security till the loan is repaid. The assignment will be executed by the policy holder and has to be endorsed on the policy.
Repayment
The loan amount and interest have to be repaid during the term of the policy. If the interest is not paid, it is added to the principal and interest is charged on it. Any claim or benefit payment will be made after deducting the outstanding amount.
Points to note
I. Since the loan amount is linked to the surrender value of the policy, it will be low in the initial years of the plan.
II. The policy may be terminated if the outstanding loan and unpaid interest exceeds the surrender value of the policy. The policyholder will lose the insurance cover in such a case.
III. If the application is made for a subsequent loan, the earlier loan and interest on it is deducted from the loan value and the balance is paid. The content courtesy: Centre for Investment Education and Learning (CIEL)
