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Everything You Need to Know About Loans Against Insurance Policies

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In times of financial instability and an inability to make ends meet, people often turn to loans as a way out. While personal loans are prevalent in this regard, several borrowers are understandably apprehensive about taking a personal loan. You pay interest on the entire loan amount regardless of how much you use with a personal loan. Thus, they may opt for a loan against security instead.

Loans against insurance policy are secured loans where you put up your insurance policy as collateral. Depending on your policy provider, you may only put up part of your sum assured instead of the whole amount. Taking this loan against policy can significantly improve your financial prospects while requiring you only to pay interest on the part of the loan used. 

Factors to Remember When Applying for a Loan Against Insurance

As a borrower, it is essential to remember that only specific insurance plans qualify as collateral – only life insurance plans. Within life insurance plans, the most popular type is term insurance plans, which do not qualify for your loan against insurance. This is one of several aspects you need to keep in mind when applying for this loan. What are some others?

  • Interest Rates

Interest rates for loans against insurance are based on the amount and number of premiums you have paid under your policy. The competitive loan against securities interest rates range between 11% to 18% today, depending on your policy, the loan amount, and the tenure. Since these loans are usually availed for more extended periods (5+ years), the interest rate may be lower.

  • Eligibility for the Policy

While the type of policy you have determines your eligibility (a term insurance holder would not be eligible), that is far from the only deciding factor. Although you do not have to explain why you need the money or your intended use, you still need to prove yourself a reliable borrower. Some standard eligibility criteria you need to meet include:

  • Being an Indian resident
  • Being at least 21 years old
  • A self-employed or salaried, with a regular income
  • Having a decent credit score

When you meet these criteria, you prove your reliability. Additionally, you can use eligibility calculators to determine if you meet the necessary requirements. Applying for the loan knowing you are eligible makes the entire process much smoother and more comfortable for you and the lender.

  • Loan Amount

Depending on the insurance policy you opt for, you are eligible for a particular loan amount. Knowing this in advance aids financial planning and optimizes the use of the loan. Loans can even make up to 85-90% of your policy.

Depending on your plan, CIBIL score, and credit score, your lender determines the appropriate loan amount for you. With this in place, you can also better plan your financial future. 

  • Repayment Scheme

You need to repay your loan during your policy term. You may either choose to pay back the principal amount plus the interest or just the interest. If you choose the latter option, the principal amount is deducted during your insurance claim settlement.

Additionally, if a borrower dies after opting for an interest-only repayment scheme, the pending amount is deducted before the borrower’s nominee gets the insurance policy’s benefits. Thus, you need to choose a repayment scheme very carefully. 

  • How to Apply for a Loan Against Insurance

A loan against insurance can offer several benefits, including a high loan value, minimal paperwork, low-interest rates, and quick disbursement. Borrowers opt for this loan due to these advantages. Once decided, they then need to apply for the loan itself. 

As long as you have the necessary documents, applying for your loan against insurance is a breeze. These documents include:

  • The loan application form 
  • Any KYC documents such as your PAN card, address proofs, and identity proofs
  • Passport-size photographs
  • The original copy of your insurance policy that you plan to put forth as collateral
  • The assignment deed

Depending on your status as salaried or self-employed, you will need to provide additional information about your finances. Checking with your provider about their exact requirements ensures a much smoother loan process and faster approvals. 

Additional Read: Trying to Get a Loan Against Securities: Here is How You Can Get it

After collating the necessary documents, you can begin your online application process by visiting your client’s website or a physical lender branch. After going through your financial statements, your lender decides if you are a viable risk and sanctions the loan. Many institutions offer instant loan approvals today when you follow the online process. 

Lenders offers loan against insurance offers flexible repayment schemes and competitive interest rates that ensure you get the maximum benefits from your loan. With long-term options and more comfortable EMIs, you regain financial security quickly, keeping you and your loved ones financially healthy with better funds!

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