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How Does Loan Against Insurance Policy Impact Your Policy’s Future Benefits?

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When you choose to invest in an insurance policy, be it a term plan, endowment policy, or a unit-linked insurance plan, you do so with the objective of securing your family’s financial future. However, unforeseen circumstances such as job loss, medical emergencies, or business failures could put you in a tight spot where you may need a quick infusion of funds. In such situations, you may consider opting for a loan against your insurance policy. But, how does doing so impact your policy’s future benefits?

A loan against insurance policy is a financial instrument where the insurer offers you a loan against the surrender value of your policy. The amount that you can borrow depends on the surrender value and the insurer’s terms and conditions. In most cases, you can borrow up to 90% of the surrender value of the policy. The loan amount is disbursed to your bank account, and you are expected to repay it with an interest rate charged by the insurer.

The primary advantage of taking a loan against an insurance policy is that it is an uncomplicated process, and the disbursal time is usually shorter than personal loans and other credit facilities. Additionally, the rate of interest on a loan against an insurance policy is usually lower than the market rates for personal loans, making it an attractive option for those who need quick funds.

However, when you opt for a loan against your insurance policy, it can have an impact on the policy’s future benefits. Here are a few ways this can happen:

Reduced death benefit

The death benefit on an insurance policy is the amount that the insurer pays to the nominee in case the policyholder passes away during the policy’s term. When you opt for a loan against your policy, the insurer deducts the loan amount and the interest accrued on the loan from the death benefit. This means that the death benefit reduces, and your nominees will receive a lower payout in case of your demise.

Reduced maturity benefit

In case of an endowment policy or a unit-linked insurance plan, the policyholder receives a maturity benefit on the policy’s maturity date. When you opt for a loan against these policies, the loan amount and the interest accrued on the loan are deducted from the maturity benefit. This means that your maturity benefit reduces, and you may end up receiving a lower payout than you had anticipated.

Impact on bonuses

In traditional life insurance policies such as endowment plans, the insurer may offer bonuses to the policyholder in the form of reversionary bonuses or terminal bonuses. These bonuses are added to the policy’s sum assured and increase the overall payout at maturity or in case of death. However, when you opt for a loan against an insurance policy, the bonuses that accrue may be impacted. Depending on the insurer’s terms and conditions, the bonuses may either be reduced or not paid out at all.

Impact on surrender value

The surrender value of an insurance policy is the amount that the policyholder receives if they choose to surrender the policy before the maturity date. When you opt for a loan against the policy, the loan amount and interest are deducted from the surrender value. This means that if you were to surrender the policy after taking a loan against it, the surrender value would be lower than what it would have been had you not taken a loan.

Impact on policy continuity

Lastly, taking a loan against an insurance policy could impact the policy’s continuity. If you fail to repay the loan and the interest on time, the insurer may terminate the policy. Additionally, if the loan and the interest amount exceed the surrender value, the policy may lapse, and the insurer may have to recover the outstanding amount from the policyholder

Conclusion

While a loan against life insurance policy interest rate can help you during financial emergencies, it is crucial to understand how the loan can impact your policy’s future benefits. It is advisable to assess your financial situation and opt for a loan only if it is absolutely necessary. Additionally, ensure that you read and understand the insurer’s terms and conditions before taking a loan against your policy. Lastly, make sure that you repay the loan and interest on time to avoid impacting the policy’s continuity and your family’s financial security.

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