There are multiple features of life insurance plan. The most important aspects of a life insurance plan is to provide death benefit. Apart from providing protection and creating wealth, they also help policyholder to opt loan against insurance policy. However, there are number of things that to be kept in mind while availing a loan.
- All Life insurance policy does not provide loan : Each and every plan of Life insurance are not eligible for providing benefit of loan. So, the first step is to to know whether your policy is eligible or not. Loan on policy is opted on basis of surrender value or cash value which has been acquired. So, only those plans are eligible in which surrender value is generated i.e Endowment plans or whole life plans etc. Term Life plans are not eligible here because it’s purpose is only protecting a life insured i.e only death benefit is given on policy, no surrender value and maturity value. The good thing is that process of getting loan on policy is quick with limited scrutiny. Less administration activities i.e paperwork is done. Overall, Loans are not applicable on each and every Insurance plans, but wherever applicable it is easy to get with minimum delays.
- How Loan amount is calculated : Once policyholder pays premium regularly for 3 years, surrender value or cash value is acquired. Loan on a policy is calculated on basis of surrender value. Loan amount is around 80-90 percent of surrender value. For ex. If Surrender value of a policy is 4 Lac rupees, then loan given on policy is 3.20 Lac. Surrender value is the value of policy that is calculated on basis of no of premiums that has been paid and it means the amount policyholder receives if he terminated the policy. However, Contract is assigned to lender(Loan provider) once loan amount is clear. Contract assignment means Policy rights are transferred from contract owner to lender.
- Interest on Loan : Interest rate on Policy loan is comparatively low than personal loan. Interest rates vary from one policy to another. It depends on two things , Premium already paid and no of premium that has been paid. Overall, If premium paid is higher then Interest rate will be lower. Interest on policy loans is around 10-12 percent while in personal loans, interest charged is around 12-15 percent.
- Loan on Paid Up Policy : Policy turns to paid up when policyholder stops paying premium after 3 years from issuance of policy. when policy turns to paid up, Sum assured gets reduced. Loans are calculated according surrender value of a policy. Loan amount is around 80-85 % of surrender value.
- Repaying Loans : There are multiple options available to policyholder to repay a loan. i) Policyholder can pay principal amount along with interest. ii) Policyholder can only pay interest throughout the policy term, then Principal amount of Loan gets deducted from maturity value and remaining amount is paid to insured. If unfortunately, life assured dies in between policy term then, Loan amount gets deducted from Death benefit. Suppose Life assured has opted Loan of 2.0 lac and Sum assured of policy is 5 lac , then beneficiary of a policy gets 3 lac So, a policyholder should keep this in mind while opting for loan, Death benefit may get impacted if Loan is availed.
- Foreclosure : A policyholder needs to continue paying interest and premium to avoid termination of policy. Policy turns to foreclosure in case if principal amount plus interest exceeds surrender value. This generally happens when insured stops paying premium and due to this surrender value does not increase. In such case, it is possible that principal amount of loan and interest may exceed surrender value. Insurance company informs about foreclosure, if policyholder does not respond to such notice, then policy gets terminated. Outstanding Loan amounts gets deducted from surrender value and remaining amount(if any) is given to policyholder.
This article is not sponsored and not meant for endorsing any particular insurance company. Please Check Terms and Condition of respective organization along with inclusion and exclusion before buying insurance policy.