Avail of loan against life policy

If you thought you could take a personal loan only from a bank, think again. You could avail of a loan facility from as many as 26 Life Insurance Corporation (LIC) policies and those of a few private insurers.

Ajith Kumar L, senior divisional manager, LIC, says, "The basic purpose of any life insurance is to provide life cover on uncertainities, but it is only LIC that offers almost 90 per cent of the paid capital to the policy holders."

A policyholder can avail himself of a loan after the completion of three years of full premium payment on insurance product. All it requires to take the loan (irrespective of the sum assured) is to give an application along with insurance policy document by the insured, he/she does not even have to give the reason for the loan. The loan is sanctioned in less than two days, adds Kumar.

However, Melanie Mathis, senior executive-marketing, Kotak Life Insurance, cautions that this is a secondary benefit and should not be the main reason for purchase of a policy. A loan taken against a life insurance policy may not always be the least expensive route for you.

She points out that an insurance policy is an asset that is rare in its implied guarantee and the protection that it provides to one's family. It has a unique feature where, in the event of death, the asset cannot be attached by the creditors unlike most other assets. Thus, the family is able to enjoy the benefits of the policy.

The paid-up value on LIC policies are calculated by the number of years premium is paid divided by the tenure of premium payable on the policy multiplied by sum assured. At present, the interest rate is 9 per cent (revised depending on market rate). Loan interest is paid every six months.

While in the case of private insurance companies, say ICICI Prudential Life, a loan is offered on some of its products that have a savings or an investment component, the loan is available only after the policy acquires a surrender value.

The maximum loan amount is dependent on the surrender value of the policy. The loan may be repaid at any time during the policy term.

In case of Kotak Life Insurance, all policyholders can avail of a loan subject to their policy having acquired sufficient value in the main account to qualify a loan of minimum of Rs 10,000.

Specific calculation depends on the kind of plan, amount of premium paid every year and amount accumulated in the accumulation/main account.

Depending on the customers' need, there could be an option worked out. However, no such option is available at present. An option is available to pay only the interest etc, and the sum assured minus the principal amount.

LIC also offers the benefit to the customer of a second loan option, even if he fails to pay the interest on the existing loan, povided the insured policy value increases with the number of years.

In the event of a claim, the outstanding loan amount and the interest are deducted from the claims proceeds. In case outstanding loan and unpaid interest become equal to the surrendered value, the policy is foreclosed.

LIC as Whole Life-WP, Limited whole Life- WP, Whole Life-SP WP, Endowment-WP, Children Asset-WP, Jeevan Chhaya, Jeevan Surabhi WP (20), Jeevan Surabhi WP (25), Money Back, Jeevan Saathi, Jeevan Aadhar, Jeevan Mitra, Jeevan Vishwas, Jeevan Anand, Jeevan Rekha, Komal Jeevan, Jeevan Bharathi, Jeevan Shree-I, Jeevan Saral, Jeevan Pramukh, Jeevan Anurag, Bima Navesh 2005 and on the recently launched Bima Gold.

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Easy, no cumbersome procedures involved and sanctioned in less than two days.

The customer can choose from only paying the interest and the prinicipal loan amount is deducted from the sum assured and can opt to pay the prinicipal as well.

Interest payable only every six months, LIC offers up to 90 per cent of the paid up capital and charges 9 per cent interest at present.

Interest rate is comparatively cheaper on a loan from insurance policy than a personal loan.

Loan is a secondary benefit and should not be the main reason for purchase of a policy.