Taking mortgage towards insurance coverage as collateral? Know dangers and advantages

You should know that not all life insurance coverage insurance policies might help you with a mortgage facility. Karthik Raman, Head of Products at Ageas Federal Life Insurance, mentioned, “You can usually take a mortgage towards life insurance coverage insurance policies which have a money worth at maturity. Both collaborating and non-participating conventional financial savings insurance policies supply a mortgage towards your coverage.” In the case of participating policy, the insurer shares profit with the insured in the form of bonuses and dividends. While in the case of a non-participating policy, you get maturity benefits, and the insurer doesn’t share any form of bonuses or dividends with the policyholder. The policies that can provide a loan facility include money-back, endowment, or whole-life policies. Raman said, “Since term plans do not have a cash value at maturity, you cannot take out a loan against such policies.”

Moreover, you might also not avail mortgage towards unit-linked insurance coverage insurance policies (ULIPS). Sunil Sharma, chief actuary and chief threat officer of Kotak Life Insurance, mentioned, “ULIPS permits the policyholder to take partial withdrawal somewhat than a mortgage.” Readers should note that policies with a cash value and ULIPs mix insurance and investment. While you can borrow against them, mixing investment and insurance is not generally advisable.

Loan requirement: You could consider taking a loan against your life insurance policy when you might urgently require a significant sum of money. For instance, you may need cash for an upcoming wedding, making a down payment on the house, paying off a creditor, a medical requirement, etc. The lenders can help you provide a loan amount equal to a maximum of 90% of the surrender value of your policy. When applying for the loan, you have to submit a loan application form, insurance policy and a signed agreement to the lender. This way, you can take a loan from a lender using the cash value part of your policy as collateral.

“The loan amount available would be a percentage of the surrender value of the policy applicable at the time of taking the loan. Typically, the policy acquires a surrender value at least three years from its inception and becomes eligible for you to take a loan. There would also be an applicable interest rate on your loan, usually linked to a standard interest rate,” mentioned Raman.

Loan tenure: The tenure of the mortgage can’t exceed the coverage maturity date. Typically, the lender assigns a mortgage time period equal to the coverage time period.

How to repay: You can repay the mortgage as equated month-to-month instalments (EMIs) partly or totally at any time earlier than the coverage matures. Repayment phrases might differ from lender to lender. Besides, you have to pay all dues earlier than the coverage time period ends and verify whether or not the lender applies any pre-payment fees.

While paying mortgage EMIs, additionally, you will must pay all premiums on time throughout the coverage time period in order that coverage doesn’t lapse. Ashwini Bondale, Senior Vice President, ICICI Prudential Life Insurance, mentioned, “If you can not repay the mortgage, the life insurer/lenders will offset the excellent mortgage quantity towards the maturity profit or give up worth because the case can be. In circumstances the place the excellent mortgage quantity exceeds the coverage give up worth, the insurer can foreclose the coverage.”

However, if the policyholder has paid all due premiums, the policy cannot be foreclosed. Sharma said, “For such policies, the amount paid on death or maturity will be the death benefit or guaranteed maturity benefit reduced by the outstanding loan amount, respectively.”

Charges: When you are taking a mortgage towards the coverage from a lender, you’ll have to pay an rate of interest between 10% and 15%. The lender might also cost processing charges as much as ₹2000 (inclusive of GST), foreclosures or pre-payment, and bounce fees. Besides, lenders can apply penal curiosity (round 2%) and annual upkeep fees.

Should you borrow? Borrowing cash from a life insurance coverage coverage has advantages like an affordable rate of interest in comparison with a private mortgage rate of interest, a faster approval course of and no fastened instalments for repaying the mortgage. Sharma mentioned, “The benefit of a coverage mortgage is that it helps the policyholder to finance its quick liquidity wants whereas maintaining the life insurance coverage coverage in power. However, you have to contemplate coverage loans as a brief choice to get liquidity. Also, you have to repay it as quickly as surplus cash is on the market to reap the unique profit from the coverage.”

Adding to it, Bondale said, “Loans against policies are available to insured at competitive interest rates compared to other routes of seeking loans.” However, Raman mentioned, “If you’ve got borrowed cash towards your life insurance coverage coverage, then within the case of your unlucky demise, the insurer will clear off the unpaid mortgage quantity from the demise profit resulting from your beneficiaries. Your beneficiaries will, due to this fact, obtain solely a partial demise profit resulting from them. Another threat is that the coverage will auto-terminate if the excellent mortgage quantity with accrued curiosity exceeds the coverage’s give up worth.” One should do not forget that on give up, the coverage terminates, and, in that case, you can not take the advantage of insurance coverage protection.

Point to notice: In case of any emergency, you have to contemplate different monetary devices to lift funds as a result of a life insurance coverage coverage is barely to financially safe your loved ones within the unlucky occasion of your demise.

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