How Can You Get Loans Against Your Life Insurance Plan? Everything You Need to Know

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Individuals may require instant funds during emergencies, but personal loans may not always be the best option. One of the several ways in which the insurance policy can help you acquire instant funds is through loans against your life insurance plan. However, you can borrow money against your life policy only if it has a cash value. Term insurance plans are cheaper but do not carry a cash value. With whole life insurance, you can conveniently apply for loans, but you need to get acquainted with the specifics and various terms and conditions for loans against life insurance plans. The article below sheds light on the process of acquiring loans against a life insurance plan and the pros and cons of the same. 

What is a Loan Against a Life Insurance Policy?

A life insurance plan is a contract between the insurer and policyholder where the insurer secures the policyholder’s life in exchange for a regular or one-time premium payment. However, a life insurance plan is more versatile than it appears. A term life insurance plan provides pure security and death benefits, while a whole life insurance plan comes with several benefits such as wealth generation and lifelong protection. Over the years, your premiums paid for whole life insurance generate a cash value and you can borrow funds from your insurer against this cash value. 

It is a fact that you can only borrow money if you own whole life insurance. You can also convert your term insurance plan into whole life insurance to enjoy various benefits. A life insurance loan is different from other forms of loans in that you don’t need to repay the loan amount, but your insurer will charge interest on the amount borrowed. 

The loan against life insurance is the money that you would have received as maturity benefits or death benefits, so the funds you borrow is advance money taken from your insurance and your policy cash value acts as collateral against the life insurance loan.

If you never repay the interest on the loan amount, the insurer deducts the borrowed amount from your death benefits.

Life insurance loans do not impact your credit score since you are borrowing your own money. Also, you receive the funds with minimal or no documentation. 

How Does the Life Insurance Policy Loan Work?

When applying for a life insurance loan, you need to have sufficient cash value since the borrowed loan is the percentage amount of cash value. Additionally, you need to pay the interest on the life insurance loan. 

Your insurance provider may charge you a loan interest rate in arrears or in advance as given below. 

  • Interest Rate in Arrears - In an arrears interest rate, the insurance company charges the interest at the policy year-end while the interest is accrued on a daily basis. If you acquire the loan in the middle of the year, your company charges interest from the date of loan approval. When you repay the loan amount in the middle of the policy year, the daily interest rate decreases, thus reducing the outstanding interest rate for that policy year. 
  • Interest Rate in Advance - In the case of advance interest rates, the insurer charges interest for the whole year, assuming the loan continues for that policy year. If you borrow the amount in the middle of the year, the company charges interest on the remaining period of the policy year. The insurers do not provide refunds or credits for the interest paid in advance if you repay the loan amount during the policy year. 

Depending on your insurance company’s terms and conditions, you may avail yourself of fixed or variable interest rates on the borrowed funds. While a fixed interest rate remains unchanged throughout the policy tenure, a variable interest rate changes every policy year. Your insurance provider will disclose the variable interest rate on each annual statement and the premiums to be paid. 

Your borrowed amount can still grow over the period since your insurance provider pays the dividend on the loan. The dividend you receive may be lower than the interest rate on the remaining cash value. However, certain policies pay the same interest rates.  

How Can You Borrow Funds Against Your Life Insurance?

To apply for a loan against your life insurance plan, you need to visit your insurance provider. Before initiating the process, you need to inquire about the effects of the loan on your policy components. To do this, you need to request an in-force illustration that depicts the life insurance policy loan depending on your plan. Also, ensure that the in-force illustration reflects the interest payment from your pocket or includes the interest on the borrowed amount. 

You don’t need to repay the loan against your life insurance policy. However, you can either pay the loan interest rates from your pocket or borrow the interest amount. In case you borrow the loan interest, the outstanding interest will also compound each year. To know the impact of your life insurance policy loan, you need to request an in-force illustration annually. 

How Much Loan An You Get with Your Life Insurance Plan? 

In a whole life insurance plan, you build a cash value by paying premiums. Depending on your cash value, your insurance provider approves the loan amount. Since the cash value growth is unpredictable, the insurance company cannot assure how much loan amount you can avail and how quickly you can get it. So, it is hard to forecast the time that makes you eligible for the loan amount against your life insurance in the UAE. Additionally, the insurance providers change their guidelines periodically on how much cash value your policy should have to acquire a loan and what percentage of cash value you can withdraw. 

Do You Need to Repay Life Insurance Loans in the UAE?

The life insurance loan repayment is optional. However, you need to pay the loan interest rates out of your pocket. In case the loan interest rates are not paid on time, they keep on compounding and have the risk of surpassing your policy’s cash value. Your policy will eventually lapse if you don’t pay the interest amount. To avoid such situations, insurance companies offer several opportunities. However, if the loan is not paid back before the policyholder’s death, the loan amount and accrued interest would be subtracted from the death benefits during the insurance claim settlement

When Should You Take a Life Insurance Policy loan?

If not taken care of properly, life insurance loans can potentially lapse your policy. So, it should not be the first choice for emergency funds. Under the following financial circumstances, you can choose a life insurance policy loan. 

  • It is difficult to qualify for a standard loan - You can opt for a life insurance loan if you are facing difficulties in acquiring standard loans. For paying emergency medical bills or similar events, a policy loan is a better choice as no medical check-ups are required. Even though you qualify for a bank loan, a life insurance loan can save your loan processing time and you can repay your policy loans once you receive your bank loans. 
  • If other loans have higher interest rates -  It is always better to opt for a policy loan than to apply for a traditional loan with collateral and pay higher interest rates. Since policy loans don’t have conditions like loan repayment tenures, renewal dates and other charges, you can avail of a life insurance loan at a reasonable cost. 
  • In the case where the policy premium is affordable - The life insurance policy will lapse if you don’t pay the premium. However, you can take a loan to keep your policy active for the duration where your death benefit is greater than the loan amount. 

What Are the Factors You Need to Consider When Applying for a Life Insurance Loan?

Before applying for a life insurance loan, you need to consider a few factors mentioned below. 

  • Loan Amount - The loan amount depends on the cash value of your life insurance plan. Additionally, you need to check if your insurance policy is eligible for a loan or not. Considering the total cash value, your insurer can sanction up to 80% loan against basic plans with guaranteed returns. Not all whole life insurance plans can offer you a loan, but if they do, your loan amount depends on the current cash value of your life insurance plan. 
  • Loan Provision in the Life Policy - Not all life insurance plans provide loans. A term insurance plan does not have a cash value, so you cannot opt for a policy loan against it. Additionally, there are several whole life insurance plans in the UAE, but not all of them come with loan benefits. Before applying, you need to check with your insurance provider whether you can get a loan against your life insurance plan or not. The insurer may also check your premium payment record before offering you the loan. 
  • Interest rates charged - The interest rates charged on the life insurance loans depend on the number of premiums already paid and the total premium amount paid. The greater the premium paid, the lesser the interest charged on the policy loan.
  • Required Documents - Before offering you the life insurance policy loan, your insurer may ask for various documents related to expenses and income along with your premium payment details. To know the exact set of documents, you can contact your life insurance provider. Along with the application form, you need to sign a deed of assignment that gives the benefits of the policy to the lender till the time you repay the loan. 
  • Premium Payments - Even after taking the policy loan, you need to continue paying your insurance premiums. In case you default on your premium payments, the insurance company can terminate your life insurance policy. 
  • Waiting Period - Since the loan offered is based on your insurance cash value, you can apply for a loan instantly after purchasing an insurance plan. Additionally, you might need to wait a few years for your loan approval. 

What are the Downsides to Life Insurance Policy Loans?

Life insurance policy loans can be easily availed of. However, they have a few downsides as mentioned below. 

  • Although the loan amount you get from your life insurance is your money, you need to pay an interest rate of up to 10% to receive the loan.
  • The policy loans do not have a loan repayment timeline. Therefore, you need to keep a tab and ensure regular repayments against your life insurance policy loans.
  • If you do not pay your loan and interest amount back, the insurer will deduct the amount from your insurance benefits. Meaning, your beneficiaries would not receive the maturity benefits. 
  • The loan interest rates compound every year, and if your total loan amount exceeds the cash value of your life insurance plan, your policy will lapse. 

The Bottom Line

In the event of a financial emergency, you need immediate funds. In such cases, loans are the best source of quick finance. However, you may face difficulty in acquiring bank loans with a processing period and higher interest rates. In such cases, you can opt for a loan against your life insurance plan. Life insurance policy loans are easy to acquire with minimal documentation and lenient criteria. However, to avail of a policy loan, you need to have whole life insurance with enough cash value as per your insurer’s criteria. 

Although you don’t need to repay your loan amount, you do need to pay the interest amount from your side. In case you are unable to repay the loan amount, including the interest, the same amount gets deducted from the insurance benefits. Therefore, before opting for a life insurance policy loan, ensure to go through the terms and conditions of the same. To get expert suggestions, contact our customer support team. You can compare various life insurance plans online by visiting the life insurance section of Policybazaar.ae.