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Do you think that insurance is a product that provides a cover only against any loss? Not always. It can come to your rescue in times of financial crunch as well. Yes, an individual can get a loan by pledging his insurance policy. Banks such as HDFC Bank, ICICI Bank and non-banking financial companies (NBFCs) such as Aditya Birla Financial offer this product.
Eligibility
Only insurance policies that have surrender value — that is an endowment or money back policy — will fetch you a loan. Which means, you cannot borrow using your pure term life insurance policies. Loans can be availed up to 80-90 per cent of the surrender value. So, older the policy, higher will be the loan limit, as the surrender value increases with the premiums paid every year.
Rates and documentation
The interest rates for taking a loan against a policy is lower compared to a normal personal loan. For instance, Axis Bank charges 15.5-24 per cent as interest for a normal personal loan. Whereas, 10.5 per cent to 12.5 per cent is the rate for loans against policies.
The insurance policy is the only major document that has to be surrendered to the bank. Though a process fee is charged, it is less compared to the fee levied for a normal personal loan. HDFC Bank levies a processing fee of up to 1 per cent of the loan amount or a minimum of ₹5,000 for loans against insurance policies.
But for a normal personal loan, the bank charges 2.5 per cent of the loan amount, subject to a minimum of ₹1,999 and a maximum of ₹25,000 as processing fee.
Pros
This is a secured loan. So, the loan processing time, fee and interest rates charged are less. Documentaion is also less since the “Know Your Customer” (KYC) verification process would have been done at the time of taking the policy itself. Another key advantage is that an individual with a low or a poor credit score can also avail this product.
This product also scores well compared to taking a loan against shares or gold, which are prone to margin calls. Also, according to experts, insurance policies can be pledged to enhance the loan limit. “The insurance policies can be pledged to enhance the loan limits, especially in case of a home loan which comes at a much lower interest rate”, says Amit Tewary, Chief Operating Officer, LoanTap.
Cons
Surrendering the policy documents to the institution at the time of getting the loan will give the lender all the benefits of the insurance policy. Navin Chandani, Chief Business Development Officer, Bankbazaar.com, says “in case of an untoward incident, the loan amount due to the lender will be deducted from the claim amount and only the balance will be paid to the nominee. So, this will bring down the relief the insurance policy can provide to the nominees”.
Hence, it is better to go for this product only for short-term needs.
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