Loan against insurance: What is it and how does it work?

A common way to get a loan is through banks but what if there are other methods too to get a loan? One of them is getting a loan against an insurance policy. Nowadays, banks consider insurance policies as valuable collaterals and provide a loan against them after certain conditions are met. These loans can only be taken against insurance policies such as money-back and endowment policies. Let’s take a closer look at what exactly a loan against insurance is and how it works:

What is a loan against insurance?

Simply put, a loan against insurance is borrowing money from an insurance company by keeping the policy as collateral. If you have a life insurance policy or a whole life insurance policy, you may be eligible to borrow against the policy's cash value. This is not the same as a term life insurance policy, which does not accrue cash value.

Borrowing a loan against insurance is like taking out money from your insurance policy. The insurance company will lend you money that will be removed from the cash value of your policy. The loan will incur interest, and if you do not repay it, the amount borrowed plus the interest will be taken from the death benefit provided to your beneficiaries.

Which Insurance policies are eligible for a loan?

One cannot obtain a loan against any sort of life insurance policy. As a result, it is best to check with your insurance company before purchasing a plan. However, products such as whole life insurance, money-back policies, savings plans, and endowment plans offer a loan against a life insurance policy. Depending on your insurer, you may be able to take out a loan against your ULIP policy, also known as a Unit-Linked Insurance Plan (ULIP).

How to get a loan against insurance?

Below is a step-by-step guide to getting a loan against your insurance policy

Step 1: Check eligibility

You must first determine whether your insurance is eligible for a loan. Other variables include age, acceptable documentation, credit score, and so forth.

Step 2: Choosing the right lender

Find a lender who will lend you money against your life insurance policy. Note: it is crucial to do thorough research and look for the greatest solutions on the market.

Step 3: Apply for a loan

Once everything is sorted you may apply for a loan by visiting the lender’s office or can also complete the formality online. Make sure you only apply for such loans after thoroughly reviewing the loan documents and repayment criteria.

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