Various types of loans are available in India. However, most of the people do not have any idea about a loan against insurance policy. The major reason behind this unawareness is the lack of insurance penetration in the country. A loan against insurance policy is known as ‘pledging’ and it is a very popular concept abroad.
This type of loan is issued by an insurance company or any other financial company that offers loans against securities. The loan is suitable for those who do not own any assets or do not want to provide the asset as collateral. Hence, instead of applying for a loan against credit card or a personal loan, you can borrow funds against your insurance plan. You need to remember that this loan is not available against a term insurance plan or equity-oriented securities.
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Things to remember before applying for a loan against insurance policy
Keep the below-mentioned points in mind before you consider applying for a loan against your policy.
Individuals who have a life insurance plan policy or a Unit-Linked Insurance Plan (ULIP) are eligible for the loan.
The interest rate on the loan will be based on the rate that is applicable during the purchase of the policy. This interest will be payable for a minimum duration of six months even if the loan has been cleared in advance and much before the tenure.
Repayment of the loan
The period of repayment is usually six months. The terms and conditions of this loan may vary from one lender to another. Certain insurance providers allow you not to repay the principal amount. When the policy matures, they will credit it from the policy value if you have made the interest payment on time.
In order to avail of this loan, you simply need to fill the application form and provide the original policy document. You also need to provide a payment receipt copy along with a canceled check to obtain the loan amount.
The most important benefit of a loan against insurance policy is that the rate of interest is lower as compared to a personal loan. There are minimal chances that the loan application will not be accepted. The loan has a simple and straightforward application process along with flexible repayment tenure. However, you need to keep in mind that such a loan can make a significant difference to the lives of your dependents. This is because according to the terms of this loan if the policyholder passes away during the loan tenure, any outstanding amount will be deducted from the policy and the nominee will be handed over the balance amount of the policy.
Before you apply for a loan against insurance policy, you need to understand the terms and conditions. You need to make sure that you have understood these aspects, as you will be more aware of the risk associated with this kind of loan.