Need Loan? Put Your Insurance At Work

Are you aware of the fact that your insurance policy can be of use in case you require quick credit? It can not only provide you loans, but can also be one of the best options available to avail loans in today’s high interest rate scenario. Let’s find out how…

For instance, you need a loan of Rs 3 lakh. The options that come in mind are personal loan, loan against collateral security like that of land, house, gold, shares, etc., and loan facility in your insurance policy.

In case of personal loan, the interest rates are usually very high for unsecured loans. A gold loan? Do you expect your wife to approve of that decision? Probably not. Loan against shares and securities is not such a good option in this volatile market scenario. And you would not like to pledge the property worth lakhs for a meager loan, in case of loan against property. Hence, the only sustainable option left with you is loan facility in your insurance policy. However, here you need to check that whether this facility is available in your insurance policy or not. It is because, not all, but most of the insurance policies provide this facility.

Loan facility in insurance policies is a convenient way to get hassle-free loan and moreover, the terms and conditions are easy to understand and are quite conducive.

Loan Amount Available

Some insurers have fixed a minimum amount available as loan. For instance, loan facility under Birla Sunlife Foresight Plan provides a minimum amount of Rs 5,000, whereas Kotak Ace Investment Plan offers a minimum loan of Rs 10,000.

Unit-Linked Plans

The loan facility provided with unit-linked plans (ULIPs) is made available on the payment of premium for minimum number of years, as per policy terms. Kotak Ace Investment Plan, for instance, provides loan only after full payment of two years’ premiums; whereas India First Young India Plan does not provide loan after the completion of five policy years.

Along with the minimum loan amount, the maximum amount also differs from policy to policy. It generally is:

Maximum Loan Amount (ULIPs) = 40% of Surrender Value, where

Surrender value (New ULIPs) = Fund value (base fund value + top-up fund value) – Discontinuous charge

In case you are opting for loan during the first five years of the policy term, your fund value will be decided after deducting ‘discontinuance charges’ as per IRDA guidelines. Following are the discontinuance charges applicable across all ULIP products, brought after September 2010.

However, for ULIPs purchased before new ULIP guidelines, the discontinuance changes will differ, as three-year lock in period is applicable on them. Under older policies, loans would be provided only after completion of three years.

Traditional Plans

When it comes to loan available on traditional insurance policy (endowment), the amount is calculated in a completely different way from unit-linked plans. For instance, in ICICI Save n Protect plan, if the policy is in-force with full premium payment till date, loans can be availed for up to 80 per cent of the paid up value or surrender value of your policy, whichever is higher.

Similarly, LIC policies offer maximum loan amount of 90 per cent of the surrender value or 85 per cent in case of paid-up value, including any bonuses.

Loan Amount (policies in force) = 80% of Higher of Paid Up Value or Surrender Value, where

Paid Up Value = (Number of premiums paid/ Total number of premiums) x Sum Assured

Surrender Value = 30% of [Total Premium paid – (First Year Premium + Rider Premiums) + Bonus / Guaranteed Addition, if any]

However, your policy acquires surrender value only once full premiums of the first three years’ have been paid.

Example

If you have taken the policy with

Sum Assured = Rs 30 lakh

Annual Premium = Rs 20,000

Policy Term = 10 years

Premium Paid = 6 years

Paid up Value = 6/10*30 lakh= Rs 18 lakh

Surrender value = 30% of (Rs 1.2 lakh – Rs 20000) = Rs 30,000

Here, paid up value is greater than surrender value, hence will be considered

Eligible Loan Amount = 80/100 x 18 lakh= Rs 14.4 lakh

However, in case of discontinuation of policies in between, maximum loan amount available under the facility will be 40 per cent of the surrender value. Althouh this is not a standard practice as some insurance companies like Bharti AXA, for example, in its Aajeevan Anand plan, allows you to take a loan up to 85-90 per cent of sum assured at any time after completion of 5 years at a rate of interest of around 13-14% per annum.

Interest Rates

Insurance companies fix a rate of interest for these policies from time to time, as per the market scenario. Once you take loan from any of the insurer on the basis of your insurance policy, the interest rates for you will be fixed. Following are few indicative interest rates that insurance companies have fixed currently.

Tenure and Repayment Schedule

The loan tenure and repayment options, like all things, differ from insurer to insurer.

For instance, Bharti AXA provides you a loan linked to your sum assured and prefers to adjust the outstanding loan amount from death or maturity benefits, instead of repayment. However, if you wish to repay, it allows you a flexible repayment option with minimum tenure of 2 years. The repayment can be done in parts or a lump sum at any time during the policy term with no pre-payment charges. Here, you would not be able to surrender the policy before repaying the loan.

Similarly, LIC provides loans with minimum tenure of 6 months. In case, you want to repay before 6 months, you will still have to pay interest for 6 months. However, in case of death or maturity benefits within 6 months of taking the loan, the interest will be charged only up to the date of maturity or death, as applicable.

On the other hand, ING Vyasa Life Insurance encourages policyholders to either repay loan in one lump sum or installments of not less than Rs 500, at any time during the policy tenure or as and when company asks.

Applicable Terms & Conditions

• In case of disbursing death benefit / partial withdrawal / surrender benefit / maturity benefit, the insurer deducts the outstanding loan amount & interest, and pays the remaining amount / benefit.
• In case the policy loan balance equals or exceeds the surrender value of your policy at any time, the policy will terminate without any value. However, in this case, the insurers will you an intimation to repay the loan and prevent your policy from foreclosure.
• In case, you have taken a loan within the first 5 policy years and have stopped paying premiums after that, your fund value will be used to repay your loan after deducting the discontinuous charges. The remaining amount of the fund value, if any, will get transferred into ‘Discontinuous Fund’.

How To Get Best Out Of It?

• To maximize your loan amount eligibility; apply for loan when your policy is still in force and invest in those policies that calculate your loan amount on basis of sum assured instead of surrender value.
• If your policy offers you loan on the basis of paid-up value or surrender value, try to opt for loans only in later years of the term.
• Try to repay fast, keeping the tenure short, so that you end up paying lesser interest.
• Also keep in mind that taking longer to repay loans may affect other benefits such as partial withdrawal, maturity, death or surrender benefits. 
• In single premium policies, such as HDFC SL Progrowth Maximizer, it is advisable to apply for loans after 5 policy years as by that time, eligible loan amount would be equal to premium paid.

Hence, it is always advisable to check your policy for loan facility when looking for credit.