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