Financial emergencies necessitate the need for emergency funding. Immediate liquidating of investments looks like a viable option. However, an informed decision should be made only after weighing the pros and cons. The most sought after opportunity is liquidating life insurance policies. Devised below is a comprehensive compilation intended to aid every investor before indulging in any decision.
Liquidating Life Insurance Policies
Loan against life insurance policy is the quickest and easiest way to obtain funds. The popularity of this policy is because of the reason that the value of policy does not change with the market. Listed below are the advantages and disadvantages of credit against the policy.
Advantages & Disadvantages of Loan Against Life Insurance Policy
1. Quick Availability
Unlike other loans, there is no tedious documentation or cumbersome processes. The policyholder can avail the loan in 3 to 5 days of application.
2. Low-Interest Rates
The interest rates depend on the amount as well as installments paid. The higher the premium amount and payments, the lesser the interest. A loan against life insurance policy in India will account for interest rates from 10.5% to 12.5%. That is lesser than the interest rates on personal loans that vary between 12 to 14%.
3. High Loan Value
The maximum loan value an investor can obtain varies between each financial platform. Generally, policyholders can avail loans between 80% to 90% of the surrender value of the policy.
4. Loans Are Secured And Require Minimal Scrutiny
Loan against the policy is hassle-free without any cumbersome documentation process. The only documents required are :
● Original Insurance Policy
● Deed of Assignment
● Canceled cheque
These loans also do not require the credit score details of the borrower. Hence it is a flexible and quick source of funds.
1. Low Loan Amount During Initial Policy Years
The loan that an investor can avail is against the policy’s surrender value and not the assured sum of the policy. The whole life insurance has value: the face value or death benefit and the one that acts as a savings account. Once the money invested increases the death benefit, the tax-free cash can be borrowed.
Since it takes more time to accumulate a substantial policy surrender value, the loan amount for the initial years would be very less.
2. Waiting Period
There is a waiting period of 3 years for every insurance policy before pledging it as collateral for loans. During this period, the lender monitors the policyholder’s promptness in paying the premium and scrutinizes if any delays occur.
3. Default On Repayment
During an event of no payment of the loan, the interest is added to the balance and accumulates. If the amount exceeds the policy value, then there is a risk of policy collapsing.
However, in the event of a policy collapse, taxes must be paid on the cash value.
If the loan is not repaid prior to the insured person’s death, then the amount is subtracted from the policy benefit the beneficiaries should receive.
4. Not All Policies Qualify As Collateral
Loan against policy options is available only on the whole life insurance policy. The term life insurance policy, cheaper and most preferred policy, does not have any cash value.
Loans against policy should be taken only when the policyholder cannot avail of any other types of loans or has a short time need. Because by availing a Loan against life insurance policy, the financial/insurance company uses the policy as collateral. They can deduct any outstandings from the policy benefits in case of non-repayment.