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POINTS TO KEEP IN MIND BEFORE TAKING A LOAN AGAINST LIFE INSURANCE POLICY

Posted on Friday May 29th, 2020

Whenever in your life, you find yourself in a financial crunch where your savings are not enough to cover up the expenses then having an insurance policy can help you to take loan against it. Life insurance policies are known to have lots of benefits over credit cards or traditional loans. Therefore, you can apply for loan against life insurance policy. Your policy will be pledged as security and desired loan quantum will be disbursed to you. However, before taking this loan, you must weigh your options if you are unable to pay the interest on it as these loans will come with certain liabilities if they are unpaid. We have listed some points to keep in mind before taking a loan against Life Insurance Policy to secure you in financial emergency.

1. No credit history needed: Life against insurance policy is very easy to get as there is no credit history needed for it. If you have a good cash value in your policy, you can take a loan with bad credit also but it should be noted that death benefits on your policy may reduce if your repayments are pending at the time of policy claim.

2. Low interest rates: These loans come with possibly low interest rates. You can borrow required funds under the total amount of cash value of your policy. You must remember that the interest rate on loan is generally taken from your permanent policy’s cash value.

3. Slow cash value: Your policy must build in value before you take loan against it. You cannot borrow during the early years as there may be little value of it. You must remember if you default then your policy gets lapsed and you may have to pay some tax over the unpaid portion of loan. Therefore, set a repayment timetable according to your convenience.

4. Unpaid interest can cause trouble: If you are paying the interest out of your budget, you have little to fear but if your insurer is paying with dividends, you may be headed towards some serious problem because unpaid interest can be accrued as income and get added to loan balance. Once the amount gets bigger than the money you borrowed, you will have to pay back the entire amount.

5. Decreased assets: You need to be pretty sure when you take a loan against Life Insurance Policy as lenders will give you many options to choose from. Your policy’s cash value will be pledged as collateral for your loan. The important thing to keep in mind is that once you take this loan, there will be fewer assets to borrow against them in the future. This loan is suitable for the individuals who are facing the unexpected debts and do not afford the costly personal loan.

At the end, availing a loan against insurance policy can be a best choice than availing a personal loan as the interest rates are lower in the former case. Moreover, taking such a loan, you may approach your insurer to secure it rather than trying it from other lending institutions as opting with insurer will get you some flexibility on repayment period and rate of interest will also be low.