Page 47 - Insurance Times January 2023

Should you take a loan using

insurance as collateral?

eople typically buy a life insurance policy to a significant sum of money. For instance, you may need cash
P provide financial peace of mind to their family in for an upcoming wedding, making a down payment on the
case of uncertainty. While life insurance policies
house, paying off a creditor, a medical requirement, etc. The
usually offer survival, maturity, bonuses and death
maximum of 90% of the surrender value of your policy. When
benefits to policyholders, you can also borrow against several lenders can help you provide a loan amount equal to a
types of life insurance. applying for the loan, you have to submit a loan application
form, insurance policy and a signed agreement to the lender.
You must know that not all life insurance policies can help This way, you can take a loan from a lender using the cash
you with a loan facility. Karthik Raman, Head of Products at value part of your policy as collateral.
Ageas Federal Life Insurance, said, “You can generally take
a loan against life insurance policies which have a cash value “The loan amount available would be a percentage of the
at maturity. Both participating and non-participating surrender value of the policy applicable at the time of taking
traditional savings policies offer a loan against your policy." the loan. Typically, the policy acquires a surrender value at
In the case of participating policy, the insurer shares profit least three years from its inception and becomes eligible for
with the insured in the form of bonuses and dividends. you to take a loan. There would also be an applicable
interest rate on your loan, usually linked to a standard
While in the case of a non-participating policy, you get interest rate," said Raman.
maturity benefits, and the insurer doesn’t share any form
of bonuses or dividends with the policyholder. The policies Loan tenure: The tenure of the loan cannot exceed the
that can provide a loan facility include money-back, policy maturity date. Typically, the lender assigns a loan
endowment, or whole-life policies. Raman said, “Since term term equal to the policy term.
plans do not have a cash value at maturity, you cannot take
out a loan against such policies."

Moreover, you may also not avail loan against unit-linked
insurance policies (ULIPS). Sunil Sharma, chief actuary and
chief risk officer of Kotak Life Insurance, said, “ULIPS allows
the policyholder to take partial withdrawal rather than a
loan." Readers should note that policies with a cash value
and ULIPs mix insurance and investment. While you can
borrow against them, mixing investment and insurance is
not generally advisable.

Loan requirement: You could consider taking a loan against
your life insurance policy when you might urgently require

The Insurance Times January 2023 41