When financial urgencies arise, a smart borrower should seek alternatives to personal loans. Among other options, a loan against insurance from insurance companies, NBFCs (Non-Banking Financial Companies), or banks is a smart choice if you are prompt in your repayments. Otherwise, you may lose your policy and policy cover.
Eligible Policies: One of the critical requirements for this type of loan is a surrender value in the insurance policy. Usually, this value becomes accessible after the policy has been active for at least three years. To pledge a policy for a loan, it must possess cash value at maturity. Endowment policies and money-back policies can be pledged, while term plans are excluded. Some NBFCs extend loan facilities against Unit Linked Insurance Plans despite ULIPs' market-linked nature.
Loan Amount & Tenure: Borrowers can secure loans ranging from 80 to 90 per cent of the policy's surrender value. As the loan tenure increases, the available amount against the surrender value decreases. For instance, the State Bank of India (SBI) maintains a 15 per cent margin for loan tenures up to 12 months, implying that only 85 per cent of the surrender value is disbursed. This margin reduces to 75 percent for loans up to 24 months and 70 percent for loans up to 36 months. The maximum repayment tenure allowed by SBI is three years.
Low-Interest Rates: Interest rates are generally lower than those of unsecured personal loans but are typically slightly higher than loans backed by fixed deposits. Interest rates, currently around 11.05 per cent for SBI, vary across banks. The interest is calculated based on the daily reducing balance, ensuring you only pay interest on the utilised amount and duration. Bank of Baroda, for example, offers rates ranging from 9.20 to 9.45 per cent for loans against LIC insurance policies.
Easy Access: Another benefit is the absence of credit checks when opting for a loan against an insurance policy. This means individuals with lower credit scores still have a chance to qualify. "As there is no checking or scrutiny involved, a loan against a life insurance policy is processed and disbursed much faster," says Canara HSBC Life Insurance on its website.
Applying for a loan against insurance follows an easy process because of the lack of additional collateral. Large banks like SBI and HDFC require you to visit a branch office and submit a loan against insurance application form.
Further, the original policy papers, proof of address, ID proof, and income proof must also be submitted. A 'Deed of Assignment' is also necessary, transferring policy rights to the lender. Once approved, the loan amount is transferred directly to your bank account.