Life Insurance Loan in UAE

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Life insurance is a contract between the policyholder and the insurance provider in which the latter pays off a sum to the beneficiary after the death of the policyholder. This type of policy helps the family members of policyholders to secure themselves after the unexpected death of the policyholder.

Besides the mentioned benefit, insurance companies also provide another advantage to whole life insurance holders, i.e., life insurance loans. In this article, we will focus on what exactly is a life insurance loan, its eligibility, whether it is a good option to apply for such a loan, and other related crucial information. 

What is a Life Insurance Loan?

Individuals can opt for multiple types of loans to secure themselves and their loved ones for the long term. One such loan type includes a life insurance loan which is distinctive from other forms of loans. The life insurance loan amount is fundamentally the amount that you would get as a maturity benefit. 

Your insurance policy cash value serves as collateral for the amount that you borrow from your insurance provider. Note that a life insurance loan is only available for those having permanent life insurance, unlike a term life insurance policy. 

As the cash value of your insurance policy acts as collateral, you are not required to repay the loan amount. However, the concerned insurance provider would charge a certain interest on the borrowed amount.  

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Advantages and Disadvantages of Taking Loans Against Life Insurance in UAE

If you are considering opting for a life insurance policy loan, you must be aware of both its merits and demerits. Enlisted below are the pros and cons of this type of loan for your consideration - 

Advantages of a Life Insurance Loan

  • No collateral is required: In a life insurance loan, you don’t have to keep anything as collateral against the borrowed amount as your insurance policy cash value itself acts as one. 
  • Zero additional fees: Insurance companies do not charge multiple fees against a life insurance loan, unlike other traditional loans. You would be just liable to pay a small amount of interest which is comparatively lower than that of standard loans. 
  • Easy approval: In most cases, your request for loan approval would be quick and easy considering the minimal documentation involved in the same. 
  • No restrictions on using the borrowed fund: Unlike other forms of loan, a life insurance loan can be used for any purpose. For instance, if you want to finance your home loan down payment, taking a personal loan would not help as it won’t be allowed. However, using a life insurance loan for the same will be approved by the concerned bank. 
  • No repayment schedule: It is important to keep in mind that the amount you borrowed does not exceed your life insurance cash value. Considering this, another benefit of a life insurance loan is that there is no specific duration to pay off the loan. As long as you do not cross the insurance cash value and pay premiums on time, you are good to go. 

Although there are numerous benefits of taking a loan against an existing life insurance policy,

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Disadvantages of a Life Insurance Loan

  • Limit of loan: Insurance companies don’t allow users to opt for the same loan amount as their insurance cash value. So, if you require more funds, you may have to consider applying for a traditional loan as well. 
  • Minimum cash value required: Not all insurance providers agree to grant you a loan after you buy a life insurance loan. As the loan amount would depend on the amount and number of premiums paid over the years, insurance companies set up criteria for loan eligibility. Thus, to apply for a life insurance loan, you would need to meet your respective provider’s eligibility requirements. 
  • Chances of policy termination: Even though a life insurance loan does not have any loan repayment tenure, the provider can terminate your existing life insurance policy in case the amount exceeds your insurance cash value. 
  • Reduces death benefit: As your insurance cash value works as collateral, one of the drawbacks of availing of this type of loan is that it reduces death benefit. For instance, if a policyholder has taken up a life insurance loan and passes away during the loan tenure, the assigned beneficiary will receive a lesser amount. On top of that, the nominee would be responsible for paying off the interest levied by the insurance company. 
How to Borrow Money Against Your Life Insurance Policy?

What is the Appropriate Time to Take a Life Insurance Loan? 

Although you can opt for a life insurance loan whenever you are in need of funds, try to restrict yourself from doing so. If you have other options to finance your needs and requirements, it is advisable to consider them first. 

Here are some points that explain when you should think of taking up a life insurance loan -  

Need for Emergency Funds or Not Eligible for Standard Loans

Your standard loan applications may get rejected by financial institutions due to numerous reasons. In such circumstances, it can become difficult to arrange emergency funds or pay medical bills. Your life insurance policy can come in handy here as it can serve as an instant source of funds. 

In addition, even if you are eligible for standard loans, you may have to wait for a longer time for the processing of your application. So if you require an emergency fund, a standard loan would not help. In such cases, a life insurance loan can be the saviour as you would be able to quickly obtain the funds.

Higher Interest Rates on Other Loans 

Compared to traditional loans, a life insurance policy loan does not involve any loan repayment feature. Moreover, the interests charged on life insurance loans are lesser than that of standard loans. Hence, it is better to take up a life insurance loan instead of other loan forms in a few cases as you wouldn’t have to pay higher interest rates or keep your financial assets as collateral. 

Unable to Afford Life Insurance Premium 

Insurance companies also allow you to take a life insurance loan if you are unable to pay the premium of your existing life insurance policy. Please mark that if the death benefit is higher than your loan amount, your life insurance will not get terminated.  

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Things to Keep in Mind Before Applying for a Loan Against Your Life Insurance

If you have decided to get a life insurance policy loan, make sure to take a few points into consideration before proceeding with the loan application -  

  • Verify if your existing life insurance policy qualifies for a loan. In case it does, determine the loan amount that you require. Note that the loan amount completely depends on your life insurance cash value and that insurance companies do not lend you the same amount as your insurance cash value. Thus, it is advisable to check with your concerned provider regarding how much funds they can lend you as a loan. 
  • Once you are sure about your eligibility for a life insurance loan, confirm with your provider about the documents required to apply for the loan. You may have to fill out a form and submit a few documents related to your existing life insurance policy, proof of income, and more. 
  • If you plan to take a loan against your life insurance, you would be accountable for paying the interest to your insurance provider. The interest would depend on the total premium and the number of premiums paid to the insurer. The final interest will be decided on the maximum amount of premium paid - the greater the premium, the lower the interest applied on the loan amount. 
  • It is necessary to note that you must keep paying your life insurance premium even after taking the life insurance loan. In case there is any mismanagement in paying the premiums, your insurance provider can discontinue your loan against your insurance. 
  • You are eligible to apply for a loan once you take a life insurance loan. However, it may take some time to get your loan approved by the insurance provider. 

Key Takeaways

A life insurance loan is fundamentally the premiums you pay for the whole life that generate a cash value and are then kept as collateral against the amount you borrow from your provider. Although a life insurance loan is easy to obtain if you have a valid life insurance policy, make sure that you do not rely upon it for emergency funds. 

In case of an unexpected death of the policyholder, the beneficiary would be accountable for paying off the remaining loan amount. Moreover, the nominee would also receive a lesser amount from the insurance company in such a case. So if you are considering taking up this type of loan, extensively analyse the pros and cons before coming to the final decision. 

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