What Is Loan Against Insurance?

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Life insurance policies can be pledged to avail of loans, while you still continue to be covered against death by the policy. Insurance plans can get you a loan with much less interest when compared to other kinds of loans — personal loans and credit cards. But the loan amount will be lesser than others. Financial institutions grant loans against all insurance policies to be pledged. However, some may allow only resident individuals to pledge unit-linked plans.

How much loan can be granted?

Life Insurance Corporation of India grants 90 per cent of the surrender value of the policy, including cash value of bonus. It levies nine per cent to be paid half-yearly, for a loan tenure of minimum six months. If you want to repay the loan within this period, the interest for six months will have to be paid. In case of a claim, either due to maturity or death within six months from the loan date, interest will be levied up to the date of claim. Banks grant a little less, with a loan-to-value of up to 85 per cent of the surrender value, for a loan of

`50,000 to `5crore. Interest is charged only on the amount withdrawn and for the period it is utilised. Interest is calculated on a daily basis and debited to your current account on the last day of every month. The amount debited has to be paid back into the current account to regularise it. There is a processing fee of 0.25 per cent of the loan amount for a minimum of `3,000 plus service tax.

Why should you take loan against insurance?

This route can be opted for to fulfil short-term fund requirement. Say, you need more than the bank's granted amount as the housing loan. You can opt for loan against insurance plans, as it comes cheaper than a personal loan or payment through credit card. Also, the life cover is active despite pledging the policy for a loan.

 

How is the loan calculated?

You can contact your insurer or check with your bank. You can assign your life cover in favour of the financial institution you want the loan from. Once the policy is assigned and registered, the drawing power, which determines the loan amount, is calculated based on the applicable margins on the surrender value of the policy. If the borrower dies, the lender will request the insurer to remit the outstanding loan. Whatever is left after adjusting the outstanding loan, the lender will pay the borrower's family or legal heir. If the borrower repays the loan, the lender will ask the insurance company to reassign the policy in his/her name.

What is the tax liability?

You cannot claim any deduction for loan against insurance. You can only claim deductions against the premiums you pay towards the life insurance policy.

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