How to Take Out a Life Insurance Policy Loan and Borrow Against It

Life insurance policies can be more than just a safety net for your loved ones. They also offer a financial solution in the form of policy loans. Whether you need money for an emergency, or to cover unexpected expenses, taking out a loan from your life insurance policy can provide a quick source of funds. In this article, we will walk you through the process of borrowing against a life insurance policy, including the documents required and important considerations.

What You Need to Know About Borrowing Against a Life Insurance Policy

Life insurance policies that offer cash value—such as whole life or universal life—can be collateralized for a loan. This means that you can borrow against the cash value in your policy. Depending on your policy and the insurer, you may need to follow specific steps to apply for a loan, including filling out forms, providing necessary documents, and signing agreements. It's important to note that these loans are not free, and you will be required to repay the amount borrowed plus interest.

Steps to Take Out a Life Insurance Policy Loan in India

To borrow money from your life insurance policy in India, you need to follow these steps:

Contact Your Insurance Company: Begin by contacting your insurance company to discuss the possibility of a policy loan. They will guide you through the necessary steps and provide the required forms. Prepare Necessary Documents: You will need to provide the following documents: Original Policy Bond: The primary document that proves you own the policy. Bank Details: Provide your bank account details along with a cancelled check or a photo copy of your bank passbook. Photo Copy of Your Aadhar Card: To verify your identity. Loan Form: Obtain and fill out the loan form provided by your insurer. Revenue Stamp: This is a legal requirement in some states and can be obtained from local government offices.

Once you have prepared all the necessary documents, fill out the application form and sign the loan agreement. The insurer will review your application and may request additional information if needed.

How to Get a Loan Against Your LIC Policy

For Lloyd's of India (LIC) policies, you can also take out a loan. Here are the steps to follow:

Visit the LIC Office: Go to the nearest LIC office with the required documents. Filling Up the Forms: Fill out the loan application form with the necessary details. Submit the Forms: Hand over all the documents to the LIC representative. Receive the Loan Amount: Once your application is approved, you will receive the loan amount within a week. It is worth noting that a nominal fee of 10% per annum is charged on the loan amount borrowed.

Key Considerations Before Taking Out a Life Insurance Collateral Loan

Before taking out a life insurance policy loan, there are a few important considerations to keep in mind:

Understand the Policy: Familiarize yourself with your policy and its provisions regarding loans. Ensure that your policy has cash value before considering a loan. Document Your Needs: If you have specific needs, such as paying for medical emergencies, ensure that the loan amount is sufficient. Payment Terms: Understand the repayment terms, including interest rates and the timeline for repayment. Late payments can affect your policy's cash value and in extreme cases, the policy may lapse.

Using the Cash Value Accurately

To accurately determine the cash value of your policy, look at the chart provided in your policy documents. This chart usually outlines the cash value based on the length of time you have had the policy and the policy amount. Multiply the cash value by the policy amount to determine the total cash available for borrowing.

Eligibility and Types of Policies

Not all life insurance policies offer the option to borrow against them. Whole life policies, in particular, are more likely to allow policy loans due to their cash value accumulation. Other types of policies may also offer this feature, but it depends on the specific policy terms and requirements.

Conclusion

Taking out a life insurance policy loan is a convenient way to access funds when you need them most. However, it's important to understand the terms and conditions associated with these loans, and to carefully consider the impact on your policy's cash value and future payments. By following the steps outlined in this article, you can take a well-informed decision and secure the financial resources you need.