Life Insurance Loans: All You Need to Know

May 07, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

You have a life insurance policy in your name. One day, you find yourself in a financial emergency where your savings are not enough to cover the costs. Having an insurance policy can help you in this case since, many life insurance plans allow you to take a loan against it.

How to Apply for Loan Against Your Insurance Policy

You can apply for loan against your term insurance policy either through the insurance company or as a collateral with a bank.

Your policy will be pledged as collateral and the desired loan amount will be disbursed to you. Life insurance policies are known to have major advantages over credit cards or even bank loans. However, before you purchase a life insurance policy, you must weigh your options if you are unable to pay the interest on your loan. In the end, they are still loans, and will come with certain liabilities if the loans are unpaid.

So, here’s a list of points you need to keep in mind before you decide to take a loan against your life insurance policy:

  • No credit check needed

It is very easy to get loan against your life insurance policy since there is no credit check required. If you have cash value in your life insurance policy, you can take a loan against it — even with a bad credit. However, it should be noted that the death benefit on your policy may reduce if your loan is still pending at the time of the claim.

  • Reduced interest rates

These life insurance loans come with a reduced interest rate. You can borrow any amount under the total amount of cash value of your policy. What you must remember is that the interest of this loan is usually taken from your permanent life policy’s cash value. Your loan has a risk of lapsing when the loan and interest exceed the value of your policy.

  • Cash value builds slowly

Your life insurance policy must build in value before you can borrow against it. If you borrow during the early years, there may be little value for you. You can set a repayment timetable according to your convenience. However, you must remember that if your policy lapses before the loan has retired, you may have to pay tax on some or all the unpaid portion of the loan.

  • Unpaid interest can be trouble

If you are paying the loan interest out of your pocket, then you have little to fear. But if your insurer is paying the loan interest with dividends or it is dipping into your policy, you may be headed towards some serious trouble. That’s because unpaid interest can be accrued as income and be added to the loan balance. Once the amount you owe is bigger than the loan you borrow, you will have to pay back the entire amount.

  • Decrease in assets 

You need to be doubly sure that taking a loan against your life insurance policy is necessary. Lenders usually give many options you can choose from. Your policy’s cash value becomes the collateral for your loan. But, the important part is that once you take the loan, there will be fewer assets to borrow against in your future.

This type of loan can be suitable for people who are faced with unexpected debts and who do not want to go for costly personal loans or skewer their credit card balance.

To sum up

Overall, taking a loan against life insurance policy can be a far better idea than availing a personal loan. In addition, when taking such a loan, you may try to secure it from the insurer itself rather than approaching some other institution. Going with the insurer will get you some flexibility on the repayment period and the interest rate will be low too.

Advt. no.: IA/May 2018/3910

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