Ever sat in front of a slot machine in Las Vegas and had the fancy thingamajig spew out your future winnings by just willing it to?

Well, you have something that comes close in the world of insurance. And, it's called 'Loan against Insurance'.

In these days of three-in-one and four-in-one plans, financial products too are keeping themselves abreast with the changing trends. Life insurance, which was traditionally a simple protective cover, is a four-in-one instrument today, combining coverage, investment, tax benefits and loan facility.

Loan against life insurance is not as popular as personal loans, and many people keep away from it.

Reason?

They don't know about it!

So, how to secure a loan against your insurance policy?

Loan against life insurance is easily available today and all major life insurance companies as well as private and public sector banks are offering it. As the insurance policy is taken as a security here, this loan is cheaper than unsecured loans like personal loans.

How is your loan eligibility decided?

Not all insurance policies are eligible for a loan option. Life insurance plans like endowment policies, money back plans and Unit Linked Insurance Policies (ULIPs) are eligible for loans while term insurance plans are not eligible for any loans. This is because a term plan does not have any cash value associated with it and the plan expires at the end of the term with no returns, unlike other plans.

Non-term plans for which the premium paid on time and for a minimum period of three years are eligible for a loan option.

Loans against life insurance are usually offered up to 70-75% of the paid up value for unit linked plans, while it can go up to 85-90% for traditional plans with guaranteed returns. Unlike personal loans, the borrower's income is not a criterion here for deciding the loan eligibility. However,the credit worthiness of the borrower will be taken into account after checking his credit score.

What are the documents required?

To avail a loan against your life insurance policy, you will need to file in an application in a pre-prescribed format. You will have to submit the original life insurance policy, and sign a deed of assignment stating that the benefits of the insurance policy will be assigned to the bank or insurance company during the loan tenure.

The policy will effectively act as a collateral security till the loan amount is repaid. Banks also seek payment receipts of future premiums and a cancelled cheque leaf to complete the documentation for loan against life insurance policy.

How can I repay the loan?

The repayment options for a loan against life insurance can differ for companies and banks. Life Insurance Corporation for example, offers loans with a minimum tenure of six months. Even if you wish to repay it before six months, you will have to pay interest for the full six months. Most companies and banks offers loan for the remaining policy term and can prepay the loan without any charges.

What is the applicable interest rate for loans against life insurance policy?

The rate of interest for a loan against life insurance is decided based on the premium paid and the number of premiums paid. The more the premium amount and the numbers, the lesser will be the rate of interest. Also lesser will be the rate traditional plans.

Banks usually link the rate of interest with their base rate. As banks consider this loan as an overdraft against the pledging of an insurance policy, it can be expensive than the loans offered by life insurance companies. Life insurance Corporation of India currently charges a rate of interest at 9% to be paid half-yearly. The interest rates of bank loans vary from 10% to 14% and are based on the type of insurance.

Things to know before applying for a loan against insurance:

Before applying for a loan against insurance, there are certain factors that you must keep in mind.

• The loan has to be repaid during the term of the policy. In the event of any default in the loan repayment, any claim will be considered only after deducting the outstanding amount.

• Some insurers terminate the policy in the event of non-payment of a subsequent premium of the policy after taking a loan.

Instead of opting for a personal loan, a loan against life insurance is easily available with lower rate of interest making it a useful tool without losing your life cover.

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