How to borrow money against your Life Insurance Policy?

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When you borrow against your life insurance plan, it could be an easy and quick method for getting cash in hand whenever you require it, there are some specifics that you need to know before you borrow. Most important thing is that you can borrow against a whole life or permanent insurance plan. A term life plan is a suitable alternative for various people; however, it doesn’t involve a cash value and expires during the end of the tenure, generally, it is somewhere between 1-30 years.

Besides the loan rates of interest, processing cost, and loan documentation against life insurance are pretty hassle-free and less as opposed to opting for a personal loan in UAE.

In the middle of a short-term issue, one opts for a personal loan for meeting the contingency. But, most of the time high interest rate on the personal loans & the repayment tenure being very short stops us. While searching for other options for meeting this issue, one such opportunity is taking a loan from a life insurance plan you have invested in for protecting yourself & your family.

It seems to be a simple alternative because you get a loan from an insurance plan on which you’ve been making payment of the premium regularly. But you must not obtain a loan from a life cover policy without any analysis or checking the advantages and disadvantages of this measure.

The following are some of the things you should keep in mind before opting for a loan against your life insurance.

1. Not each plan is eligible for a loan

All the life insurance policies  aren’t necessarily eligible for such a loan. Unit-linked life insurance plans and term insurance plans are not eligible for such loans usually. However, the loans could be taken on the traditional insurance plans like money-back plans and endowment. Therefore, it is necessary to check the kind of your life cover plan you hold and if it’s eligible for a loan against it.

2. Surrender value

In case you have a life plan where the amount of sum assured is AED 1,000,000. In fact, the amount of the loan is based on the surrender value of your plan. The surrender value refers to the present value of your plan at the time of the termination of the plan that is done voluntarily. In most of the cases, you’ll become eligible for an amount of loan of 80-90% of the surrender value. For instance, if you have invested in a life policy having a sum assured amount of AED 1,000,000, you would want to opt for a loan against your policy. In case the surrender value becomes AED 500,000 at that time, you can opt for a loan amount of AED 400,000-450,000 only.

3. Waiting period

Only investing in a life insurance plan doesn’t make you eligible for a loan. Generally, there is a waiting period of 3 years before becoming eligible for taking a loan against the life insurance plan. You should not default on the premium amount during this waiting period. Moreover, you have to continue making payment of the premium within the term of this loan. 

4. How do your repayments work?

The benefit of opting for a loan against your life insurance plan is that you have the complete term for paying back the loan. The way you want to make repayment of your loan may vary. You may either continue to make payment of the interest daily or pay back the amount of principal. When the term of your policy comes to an end, the remaining balance of the amount of loan will get adjusted with the total amount of claim settlement. Therefore, it is a win-win condition for both the policyholder and the insurer.

5. What happens if you default on the repayment and premium?

In a situation like this, the policy gets lapsed and the insurance provider has the right of recovering the dues from the insurance policy’s surrender value. In case something like this happens, the main purpose of taking a life insurance plan for securing yourself as well as your family will fall flat though you may end up achieving your short-term needs. Therefore, it is essential that you weigh your alternatives before opting for a loan against your life insurance plan.

Pitfalls to avoid while applying for this loan

You may borrow funds against your life plan, which has a cash account for use when the insured individual is alive. However, there are some of the pitfalls that you should avoid, which are as follows.

1. Do not tamper with your guarantee

The permanent life insurance gives a guarantee that is dependent on some particular assumptions. The main amongst these assumptions is that you will have to stick to the payment of your premium and accumulating the cash at some level. In case you take the cash out, you might deplete the required amount for ensuring the guarantee.

2. Do not reduce your death benefit

Taking funds from your life insurance plan while you are still alive could decrease the survivor benefit.

3. Do not end up making more payment of money

Some of the permanent plans will also ensure your guarantee while you take out the cash; however, at a price that could force you in making payment of more premiums for covering the difference.

Always keep in mind that a loan against a life insurance plan is like a sword with double edges. Though you can get this loan easily, you must not default on your principal or premium or interest for keeping your policy active. Therefore, it is important to make well-informed and wise decisions.

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