Things to Keep in Mind Before Opting for A Loan Against Your Life Insurance

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If you are considering taking a loan against life insurance policy, there are a number of factors you need to keep in mind. As it is known that the policyholders can take up a loan against their insurance plan and other benefits, more and more people are opting for it. It has become a popular choice for customers since loan against life insurance offers a lower interest rate as compared to other financial models. Another benefit of taking up a loan against life insurance is that your policy value will not change with the market. 

With that said, here are some considerations you must take before opting for a loan against your life insurance. 

#1 Eligibility of your policy

You need to determine whether your life insurance policy is eligible for a loan since not all life insurance policies provide this service. For instance, you can take a loan against the surrender value of whole or permanent life insurance and not against term insurance. This is because term insurance doesn’t contain cash value, and they tend to expire at the end of the term without earning returns. 

When you are taking up a loan against your term insurance, you are essentially borrowing from yourself. That means you can use the money for any kind of spending and expense without needing to provide and explanation. 

#2 The amount of loan you want 

While you may require a certain amount of loan, the actual amount you will get will be based on your eligibility. The loan amount you will get is the percentage of the loan’s surrender value, which can be up to 85-90% with guaranteed returns. Therefore, the loan amount you will get will depend on your monthly premiums, the type of fund, and the current value of the corpus. After the loan amount is decided, the lender is assigned with the policy, meaning all the rights of your insurance policy will be transferred to the lender. The lender will then sanction the loan amount to you – the borrower. 

On the other hand, this type of loan is not taxable since the income tax authorities don’t recognize the loan amount as income. 

#3 Interest charged on loan against life insurance 

The interest charged for taking this type of loan is based on the number of premiums you have already paid and the premium amount. The more the number of premiums paid and more premium amount, the lower will be the interest rate charged. 

#4 Required documents 

You will have to submit your original insurance policy as well as fill a pre-prescribed form. Moreover, you will have to sign a deed of transfer testifying that the benefits of your insurance policy are transferred to the lender during the loan period. You will have to contact your insurance provider for further details on the process and documentation needed. 

Conclusion

When taking up a loan against your life insurance plan, you must consult the proceedings with an experienced advisor. He/she will be able to educate you about this type of loan so that it becomes easy for you.