Loan is needed during the times of financial emergency. At such a time people think of a personal loan. But these days, one can take a loan against a number things such gold, credit card, fixed deposit (FD), insurance policies, public provident fund (PPF), National savings certificates (NSC), etc. Among these, loan against insurance policies is also gaining popularity.
But, should you opt for a loan against insurance policy? Given below are some advantages and disadvantages of the same.
1. The disadvantage of this type of loan is that people believe that the loan can be taken against the sum assured of the policy. But this is not true. The loan gets sanctioned against the policy's surrender value only. Another thing to be noted here is that the loan that the policyholder can take against the policy can be limited in the initial years of the policy.
2. Another disadvantage of this type of loan is that one can take a loan against traditional life insurance policies (such as endowment policies, money-back plans, whole life etc) only and not against a term plan.
3. One can not take a loan against insurance policy as soon as they buy it. There is a waiting period of around three years on them. The lender checks if you have paid the premium or have defaulted during that three-year waiting period.
4. If you have taken a loan against the insurance policy, then it may be noted that the amount of the loan varies from one insurance company to another. Usually, policyholders get loan equal to 80 to 90 per cent of the surrender value of the policy. The amount you get when you terminate your insurance plan voluntarily is surrender value.
4. If you have taken a loan against the insurance policy, then it may be noted that the amount of the loan varies from one insurance company to another. Usually, policyholders get loan equal to 80 to 90 per cent of the surrender value of the policy. The amount you get when you terminate your insurance plan voluntarily is surrender value.
5. The advantage is that a loan against an insurance policy gets approved instantly and the interest rate on these loans are lower compared to the interest rate on personal loans. Unlike gold loans, the collateral value of the policy remains constant throughout the loan period.
6. The policyholder can avail a loan by pledging it. This type of loan is issued by the insurance company itself or any bank. The interest rate charged on loans against an insurance policy is dependent on the premium amount and the number of premiums paid.
7. If the policyholder dies during the loan term, then the loan outstanding can be recovered from the sum assured at the time of claim filed by the nominee and the remaining amount will be paid to the nominee.
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