In today’s times, one might also require to take a loan when in any case a financial emergency comes up. For any situations like these days, a Personal Loan in Mumbai is one of the biggest options. However, is it the most vital option? Instead of going for an expensive option such as a personal loan in Mumbai, there is another option one can consider. It also ensures to take a loan against a possible life insurance policy.
The Pros of availing loan against life insurance
- One avails high loan value
The maximum loan one can get against such an insurance policy generally differs from one insurance company to any another. Typically, the policyholders can easily avail loans which is equal to almost 80-90 percent of the surrender value of the mentioned policy.
In order to have a surrender value, it is the value of such a policy that one potentially avails when a person typically terminates the insurance plan voluntarily. As it is said, “If a person has an insurance cover of Rs 50 lakh as well as surrender value is Rs 20 lakh such as at the time of requesting loan, the policyholder is likely to avail a loan of around Rs 18-19 lakh.”
- One may get a low interest rate
Interest rates charged by numerous insurance companies on multiple loans taken against their life insurance policies are typically reduced than those charged on personal loans in Mumbai. It is said that the interest charged on a loan taken against a life insurance policy depends upon the premium already paid as well as the number of times the premium is paid. The more the premium paid and the number of times, the lower the rate of interest. “Given there is wealth coming from the life insurance policy as collateral, the rate will be lower than an uncollateralized loan,” he said.
At this moment, a personal loan will gradually come at a rate of interest of 12-15 percent. As in case of loan against life insurance the rate of interest might be charged depending on the insurance company, it’s substantially lower than what is charged on personal loans. As seen by the past trend, rates of interest on loans against insurance policies can be typically observed between 10-12 percent.
- Quick availability of loan
For when it comes to avail quick loans with minimum paperwork, loan against life insurance scores over other kinds of loan. As with any other types of loans, it is particularly no lengthy along with an inconvenient application process for the loan against an insurance policy. A person can avail loans in a matter of days with minimal delays. Generally, policyholders can ensure to get loans within a period of 3-5 days of application.
The cons of taking a loan against insurance policy
- You can get a smaller loan amount in the initial policy years
It is widely believed that such a loan can be taken against the sum assured of the policy. However, that’s not true, your loan gets sanctioned against the policy’s surrender value only. As it may take years for a policyholder to accumulate a significant cash value/surrender value under their life insurance policy, the loan that the policyholder can take against the policy can be limited in the initial years of the policy.
As popularly said, one requires to first check with the insurance provider whether the policy is eligible for a loan or not. Nonetheless the maximum amount of loan one can avail is around 85-90 percent of the surrender value of the policy, if it takes a loan in the beginning year, the amount of loan availed will be significantly low as it takes years for person to accumulate a predominant surrender value under their life insurance policy.
- Not availing a loan on all kinds of life insurance
A loan can be essentially taken only against conventional life insurance policies as well as not against a period of term plan. Conventional plans involve endowment policies, money-back plans, whole life etc., where there is a guaranteed return.
As said, it is known as the Term life insurance policy is considerably not eligible for availing any kind of loans. It should be either a conventional plan or any endowment plan. Nevertheless, numerous insurance companies often offer loans against unit-linked insurance plans.
- There is a waiting period
It would be possible to be eligible for availing a loan against the life insurance plan as soon as one purchases it. There is a waiting period of around a period of three years. The lender basically checks whether one has paid premium, or has defaulted, during the three-year waiting period. Accordingly, the loan is sanctioned on the basis of the surrender value. Personal Loans in Mumbai are easily available at low interest rates to assist small scale business owners to upscale the business.
What policyholders should do
The purpose of purchasing life insurance is to insure our loved one’s financial security in such a case of one’s unfortunate and unforeseen demise. Nevertheless, in case of an emergency if a person wants to take a loan against life insurance, then it should be used sparingly only for short-term tenure or when the borrower is unable to borrow any other kind of loan.