A loan from life insurance policy is a smart way to access funds without selling investments or assets. Many insurance policies, particularly whole life and endowment plans, allow policyholders to borrow against their cash value while keeping coverage intact.
This guide explains how to use your life insurance policy as collateral, its benefits, and key considerations before taking a loan.
How Does a Loan from a Life Insurance Policy Work?
When you take a loan from life insurance policy, the insurer or a bank provides funds using your policy's surrender value as collateral. The amount available depends on the policy type and accumulated cash value. Typically, lenders offer 70% to 90% of the policy’s surrender value as a loan.
Repayment terms vary, but if the borrower fails to repay, the lender can recover the outstanding amount from the policy’s maturity payout or death cover.
Benefits of Taking a Loan from a Life Insurance Policy
1. No Need for Credit Checks
Since the life insurance policy acts as collateral, lenders do not require a high credit score. This makes it easier for policyholders to access funds without affecting their creditworthiness.
2. Lower Interest Rates
A loan from life insurance policy typically has lower interest rates compared to personal loans or credit cards. Since it is a secured loan, the risk for lenders is reduced, allowing for competitive interest rates.
3. Quick and Hassle-Free Processing
Unlike traditional loans, which involve lengthy approval processes, life insurance-backed loans are processed quickly. Since the insurer already holds your policy details, minimal documentation is required.
4. No Obligation to Repay Immediately
Unlike conventional loans, where regular EMIs are mandatory, policy loans often have flexible repayment options. Some insurers allow policyholders to repay at their convenience, provided the loan is settled before policy maturity.
5. Policy Benefits Remain Intact
Taking a loan from life insurance policy does not cancel the coverage. The policyholder and beneficiaries continue to receive life cover, although the outstanding loan amount may be deducted from the final payout.
Key Considerations Before Taking a Policy Loan
Loan Amount Limitation: The loan is limited to the policy’s surrender value, which may not be sufficient for large financial needs.
Impact on Death Cover: If the loan is not repaid, the insurer deducts the outstanding amount from the death cover payout.
Interest Accumulation: Interest continues to accumulate over time, affecting the policy's final benefits.
Using the Bajaj Finserv App for Quick Policy Loans
The Bajaj Finserv app simplifies the loan application process, making it easier to borrow against your life insurance policy. With a user-friendly interface, the app allows policyholders to check eligibility, compare loan offers, and apply for funds instantly. The digital process reduces paperwork, ensuring quick approvals and hassle-free disbursals. Additionally, borrowers can track loan repayment schedules and manage EMIs efficiently. Whether you need funds for an emergency or planned expenses, the Bajaj Finserv app offers a seamless way to access a loan from your life insurance policy.
Conclusion
A loan from life insurance policy is a convenient and cost-effective way to access funds while maintaining life cover. However, borrowers must evaluate repayment terms, interest charges, and potential impacts on policy benefits before proceeding.
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