A short-term cash crunch can come unannounced and when faced with a situation like this, you need funds quickly and at a low cost. In such cases, you can borrow money against a life insurance policy. A loan against a life insurance policy offers a high amount, low-interest rate and flexible repayment terms.
In fact, a loan against the insurance policy’s interest rates is lower than that of personal loans, making it ideal for short-term financial needs. However, before you apply for a loan against your life insurance policy, take note of the following pointers so you make an informed decision.
Not all life insurance policies are eligible for such loans
Some insurers only sanction a loan against whole life, endowment, and money back policies and not on term policies and ULIPs. Other lenders such as Bajaj Finserv offer a Loan Against Insurance Policy when you hold Bajaj Allianz ULIPs. Here you can access a significant loan amount of up to Rs.10 crore that you can repay in 12 months.
You can also enjoy other services such as a dedicated relationship manager, disbursal within 72 hours, and nil foreclosure and prepayment charges. Best of all, apart from insurance policies you can pledge other investments too, be it shares, ESOPs, FMPs or mutual funds.
A loan against an insurance policy is subject to a waiting period
You cannot apply for a loan against insurance policy immediately after availing the policy and you are required to wait for at least three years before you do so. It’s best to be absolutely sure of these terms before you count on this financing option. Also, make sure that you pay the premiums regularly, before and after availing a loan against your policy.
You can’t avail the entire policy amount as a loan
You cannot apply for a loan against an insurance policy for the whole policy amount. Lenders calculate the loan amount based on the policy’s surrender value. This is the amount that you are eligible to receive in case you want to terminate the policy before the tenor. Bajaj Finserv offers a loan of up to 50% of the surrender value of the policy. So, if the surrender value of your policy is Rs.50 lakh, you can get a loan up to Rs.25 lakh.
The repayment tenor is short
The repayment tenor of a loan against an insurance policy differs from lender to lender but it is a short-term loan, which means that you are likely to have to pay it in around 12 months. However, when you take this loan from Bajaj Finserv, you can opt for the Flexi facility by which you can minimize your interest outgo and manage cash flow better.
It lets you withdraw from the total loan amount as and when the need arises and pay interest only on the utilized amount. What’s more, you can opt to pay interest-only EMIs and repay the principal amount when the tenor ends. This can help you save up to 45%!
Defaulting on the loan may lead to termination of the policy
If you default on repayment of the loan and the premium of the policy, your policy will be terminated, defeating the purpose of availing insurance. Also, the insurer is likely to recover the outstanding loan amount and interest due by deducting it from the policy’s surrender value. Therefore, make sure that you have the means to repay the loan before you take it.