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7 reasons why insurance as loan collateral is advantageous

You are well aware that loans, where you don't offer any security to the bank, are expensive... for example your personal loans or the credit card outstanding balances.

As such, you can save a lot on the interest charges, if you can provide a fall-back option i.e. a collateral to the lender. I had, sometime back, discussed the 11 Salient Features of Loan Against Securities and why Loan against Gold is a smart idea.


In this regards, insurance policy is another excellent product that you can offer as a security. And, given that insurance is one of the most preferred forms of investments in India, it would indeed be rare where people don't have a policy to pledge to their lender.

So let's look at why insurance ranks among the good loan collaterals.

1. Needless to mention, lower interest cost is the biggest plus point. In fact, LIC is presently offering loan at mere 10%, against its policies. Other insurers and banks / NBFCs too have quite competitive offers on the rate aspect.

2. It is a 'no-questions-asked' loan. In other words, no income proof; no credit report; no income-tax returns; nothing.

3. Given that the paperwork is minimal, disbursement can happen within a matter of days.

4. The loan eligibility is quite high; generally at around 85-90% of the surrender value of the policy.

5. Your insurance cover continues without any break; the only drawback being that the claim amount would be reduced to the extent of the loan outstanding.

6. If you are not sure about the utilization, you can take the loan in the form a limit sanctioned (from banks / NBFCs). Thereafter, you can withdrawn only the amount desired and hence save on your interest expense.

7. Normally, there are no EMIs. If it is a limit sanctioned, there is no repayment schedule. You can clear the loan after one year, or even roll it over. Or, LIC doesn't even insist you to repay the principal. Just pay your interest charges regularly and the principal part would be deducted from the claim / maturity proceeds.

Key information on loan against insurance
a) These loans are available primarily against endowment or moneyback type of plans, where the policies have acquired a surrender value. Since there are no returns in term policies, they cannot be pledged to get a loan. Though ULIPs are also eligible for loans, the loan amount may be restricted depending on the type of policy you have.

b) While you can approach various banks or NBFCs, it might be simpler and cheaper to approach your insurance company itself. In fact, as per a recent report, total such lending by LIC is more than that of all banks put together.

c)  As you may have noted, basically you are getting your own money... in the form of a loan with interest charges. Therefore, you must avail this option only if the requirement is temporary and you have the capacity to repay the loan in a year or two. However, if you think you won't be in a position to clear the loan, you might as well surrender the policy and take back your money with no interest burden.

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