Policy loan or loan against a life insurance policy could be an easy way to handle financial emergencies. Contact your life insurance company now!
Policy Loan: A Feasible Way to Tackle Financial Emergencies
“It wasn’t raining when Noah built the ark.” ~ Howards Ruff
The unfortunate reality is that most of us are not prepared for financial emergencies beforehand. We often act after we face one. But don’t worry! In an uncertain economy like India, your life insurance policy could be a very important investment, in case you face a major financial emergency.
You can borrow money against such a policy. However, you can only borrow against permanent or whole life insurance. Whole life policies can be expensive but they do not have any expiration date. Unlike term insurance, which is cheaper but doesn’t have a cash value if the policy holder survives the term. Contact your life insurance company for further details.
Policy Loan: An Insight
When it comes to whole life insurance, premiums are higher, which thereby creates a cash value after a few years. Such policies have two types of values, face value or death benefit and the cash value, which acts as a savings account. Your premium paid increases the death benefit, which is the tax-free component against which you can take a policy loan. An insurer will keep the policy as collateral for the loan.
Unlike any other bank loan, a loan against policy does not affect your credit or CIBIL score. Policy loan has no approval process or credit check. Technically, you are borrowing from yourself, hence no explanation is required. You can use the loan amount for anything from bill payments to vacation expenses.
As the interest rates on a policy loan are much lower than that for bank loans, there is no compulsion of making a monthly payment. But, you should pay back the loan within the given time. When unpaid, the interest will add up and the total liability can exceed your policy’s cash value, which can cause your policy to lapse.
Steps to Borrow Money from Your Life Insurance Policy
Firstly, you need to determine whether your policy qualifies for a loan. For that, you need to contact your agent or life insurance company to confirm if there’s a loan provision. For the most part, you can certainly borrow against a permanent or whole life insurance policy. Only the policy holder can borrow money from it, unless the beneficiaries are also the owner. Before you borrow money against your policy, you need to grow your cash value. This happens when you own the policy for as long as ten years.
You can typically borrow up to the cash value you’ve accumulated in the policy account, but the guidelines may always differ from one company to another. So, you need to find out the cash value of your policy.
The next step is to contact your insurer to obtain the necessary forms. You can also download the form from the company’s website. You’ll have to properly identify the owner of the policy, for which you’ll have to provide the owner’s contact information. Don’t make the mistake of take-and-forget in a policy loan, since you don’t have to make monthly loan payments, or pay back the loan within a certain time. Always pay the interest every year to prevent the loan from increasing.