Taking a loan against insurance policies helps against emergencies. Loans add some measure of liquidity to the long term insurance investments. Casparus Kromhout, MD and CEO, Shriram Life Insurance says, “People opt for loans against insurance policies as they are cheaper when compared to personal loans.” Also, interest rates tend to be cheaper than personal loans.

The loan against insurance policies is also quickly available, because of which people usually opt for this type of loan. These loans are offered as a percentage of the surrender value already accrued for the policy. Thus the processing is easier and faster. In most cases, the policyholder is only required to pay the interest against the loan along with the regular premium for the policy.

Loans against insurance policies are generally offered against selected traditional or endowment life insurance policies that have a surrender value. Note that, there is a waiting period of 3 years for policies to be eligible for loans. However, loans against insurance policies cannot be opted for against term insurance policies. Also, though loans can be provided against ULIP plans, very few companies provide that option.

When should you take a loan against your insurance policies?

The purpose of having a life insurance policy is to ensure our loved one’s financial security. Thus loans against policies should only be taken for emergencies and for shorter durations. Industry experts suggest loans against an insurance policy should only be taken during emergencies. Firstly, a policyholder should check with the insurer if the policy is eligible for the loan and the amount of loan that can be received against the policy. Policies that have been in force for a longer duration would have better loan values.

Who should avoid taking a loan against their insurance policies?

If you are in the initial years of the policy then the loan amount available is smaller, you should avoid taking a loan against your insurance policies. Once a loan is taken against a policy, the policy gets assigned to the lender who may reserve the right to deduct the loan and interest outstanding in case of a situation of death of the policyholder. Kromhout says, “Keep in mind if one is unable to pay the interest for the loan along with regular premiums the policy risks getting foreclosed and thus one would not be eligible for any benefits against the policy.”