When should one opt for a loan against a life insurance policy?

When should one opt for a loan against a life insurance policy?

A life insurance policy is designed to provide a protective cover. However, life insurance is a far more versatile option nowadays. While they are primarily aimed at providing financial cover for the family in case of the death of the breadwinner, insurance policies can also be used to raise money for urgent needs. At times, one may need to take a loan when a financial emergency comes up. In such a situation a personal loan is one of the quickest options. But is it the best option? Instead of going for an expensive option like a personal loan, there is another option you can consider. This is taking a loan against a life insurance policy. So, not only does it provide security, but it also helps when one is going through a cash crunch.

What is a loan against an insurance policy?

A loan against an insurance policy is an arrangement where a borrower can avail loan by pledging their insurance policy as collateral with the insurance company. If the borrower is unable to pay back the loan on time, then the company reserves the right to hold on to the policy until the debt is realized in full.

Which insurance policies are eligible for a loan?

You cannot avail of loans against every type of life insurance policy. Therefore, it is better to check with your insurance company before buying any plan. Policies such as whole life policy, money-back policy, and endowment plan provide a loan against a life insurance policy. However, such loans are not available against term insurance policies and unit-linked plans. (This does not mean you do not take term insurance policies. The use of insurance is to protect your loved ones after you are gone, hence, a term insurance policy is a must)

Eligibility

When borrowing a loan against an insurance policy, you are essentially borrowing from yourself. You can thus borrow the money for any kind of expenses without having to provide an explanation, and you do not have to undergo intense scrutiny or a stringent approval process. Though the income of the borrower is also not a deciding factor for deciding the eligibility, the creditworthiness is considered nevertheless.

How much loan can I get against my insurance policy?

You can get a loan against an insurance policy starting at Rs 2 lakh, and up to 80% of the surrender value of the policy you pledge. Surrender value is the amount that a policyholder gets if he/she decides to exit the policy before maturity.

On what basis is the interest charged?

The interest rate charged in the case of a loan insurance policy is based on the premium already paid and the number of premiums that have been paid, the more the premium amount and the number of premiums paid, the lower the rate of interest charged. Usually, the interest rates are charged around 10% p.a., for loans taken against insurance policies.

What are the documents required?

To avail of this loan, a policyholder will have to submit:

A loan application form
The original insurance policy document along with your address proof, ID proof, and income proof
'Deed of Assignment’ which will assign your insurance policy in favor of your lender
A copy of a canceled cheque
Payment receipt for the loan amount

What happens if you fail to repay?

If you fail to repay the loan taken against your policy, then the interest will keep adding to the balance amount. If the loan amount exceeds the insurance policy’s surrender/cash value, then this can become a reason for your policy lapse. The insurer can recover the loan amount and interest from the surrender value of your policy and may also terminate your insurance plan.
Be extremely careful when you are choosing this option, do not take a loan on an insurance policy if you know you won't be able to repay it. In this case, you will lose all the benefits of the policy.
Note: In the event of a policy lapse, taxes must be paid on the cash value.

Conclusion

Note that when you opt for a loan against the life insurance policy, like any other secured loan, the collateral is assigned to the lender. This means that the lender has the right to deduct the interest and principal amount in case of the death of the policyholder. This could compromise the financial security that you had placed in mind for your family. Therefore, before you plan to avail of such loans, make sure to go through the terms and conditions of the lender to avoid any discrepancies at the time of applying for a loan against an insurance policy
Ideally, opt for such a loan if the loan has a short tenure and you are unable to seek an alternative source of borrowing. You may also opt if you have a term insurance policy in place to secure your loved ones' future.

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Things To Do After You Buy A Health Insurance

Hi there

Usually, we have health insurance and discuss how to get health insurance. In this article, we discuss things to do after you buy a health insurance plan.

1. Understand claim procedures

In the case of emergency hospitalization and in the case of planned hospitalization find out the documents and steps necessary to intimate the insurer. Copy this information from the insurer or TPA’s website onto a word processor, print it, and keep it along with the policy document and policy ID card.

2. Recognise that ‘cashless’ is not a right!

Health insurance comes with a right to claim reimbursement. However, cashless claims are more of a privilege than a right. It is quite possible that the insurer may either deny cashless or allow it partially and ask the insured to claim the rest of the expenses via reimbursement after the hospitalization is complete.

3. Prepare for the next premium

Even if you choose not to increase the cover each year, do not assume the premium will be the same next year. The premium could increase due to other reasons – age of individuals, the risk profile of the entire group covered by the group, underwriting test, and perhaps medical checkups too. Start an online recurring deposit that matures 6-8 weeks before the premium is due. If you are comfortable, you can choose to put money aside in a liquid fund for your insurance.

4. Understand the implications of sub-limits

There is nothing wrong with buying a policy with room-rent sub-limits. The only precaution is to ensure that the room-rent is always lower than that allowed by the sub-limit. This is because every kind of hospital fee (medicines, doctor fees, etc.) is linked to the room rent. So if you choose a room rent higher than that allowed by your policy, you will only be reimbursed (or paid via cashless) a portion of the hospital bill.

5. Recognize the impact of non-medical expenses

Hospitalization is not only about paying hospitalization fees! There is a huge list of non-medical expenses that any patient could incur. There are some administrative expenses, household expenses (while you are hospitalized), support staff expenses, and some expenses which get rejected in your insurance. Even if you believe that your health insurance cover is sufficient, these expenses have to be paid. This is where your emergency fund will come in handy. So ensure that you have one in place.

6. Health Cover for family members

If you are the earning member it is very crucial to have your own insurance but it is equally important to have health insurance for your family members, as any medical emergency for them would result in a financial setback for you and the entire family.

If the budget is a constraint you can consider taking up a family floater plan - watch our youtube video on this.
https://www.youtube.com/watch?v=F0JNvA5a_eQ&ab_channel=WealthCafeFinancial

Health Insurance could be considered as one of the trickiest insurances to buy as the health issues are very different for each person and then each insurance company has varied insurance needs. As a practice, do understand the various clauses of your insurance and have an emergency fund in place to be stress-free of any unforeseen health issues.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

To learn more - you can check our course - NM 102: Build a Safety Net. Use code SAVE20 for 20% off.

Insurance - 10/09/2020

Nomination process in case of life insurance

You are buying life insurance to secure the financial life of your dependents. To avoid your financial dependents of any troubles you must ensure that you have bought a cover of the adequate amount, disclosed all the correct details and informed your dependents about you having a term Insurance.

Have you nominated your dependents in your life insurance or you thought that you shall do the same eventually?

What is Nomination?

Nomination is a right given to the life insurance policyholder to appoint a person or persons to receive the benefit under the policy in case it becomes a death claim. Assume if a person who is insured dies, the nominee is entitled to receive the policy proceeds subject to certain conditions.

Meaning of a nominee as per the earlier laws

Earlier, the nominee in your insurance policy would not in actual receive and benefit from the insurance money but was to act as a trustee of the claim amount he or she would receive from the death claim.

Acting as a trustee means that the nominee had to distribute the claim amount as per the legal heir rules or the WILL of the deceased person.

Hence, earlier nomination meant not an ownership of claim amount. This lead to many legal battles between nominees and legal heirs to claim the death claim amount of the insured person.

What is the meaning of Beneficial Nominee in your Life Insurance?

IRDA introduced the concept of Beneficial Nominee.

Now as per the new rules, suppose you nominate your parents (sibling is not included), spouse or children, then they will be considered as the beneficial nominee and the death claim amount will be payable to ONLY them.

Other legal heirs as per the will or otherwise cannot claim the death claim amount. Accordingly, Life Insurance Company will pay the death claim benefit ONLY to the nominees.

Hence, while buying a life insurance, you must have a clarity of mind as to whom do you want the death claim amount to be payable in your absence. The nominee also has the right on the claim money if the policyholder dies after the policy period is over but before receiving the maturity benefited.

Things to keep in mind while assigning your nominee

You as the policyholder can declare the nominee at the time of policy application, or at any time later during the term of the policy.
You can nominate anyone as a nominee – your spouse, your children, relatives, your friends, unrelated people, anyone. You need to provide details such as full name (as per the nominee’s documents), gender, address, age and the relationship between the nominee and you (if there is one).
Suppose you nominated your friend or someone who has no insurable interest in your life, then such non-relative will not be treated as the beneficial nominee. In such a situation, your actual beneficial nominees or legal heirs can prove that he or she is not a beneficial nominee and can get the claim amount from the nominated person.
A valid WILL still can negate the rights of beneficial owner and money can be disbursed according to the WILL of the insured.
The nominees’ details are generally printed or endorsed on the policy certificate. If such information is not available on policy document, then the nomination is not valid.
Change or cancel nomination for INR 100 for each change.

Types of nomination permitted or advised

You can also nominate multiple people in a particular ratio, e.g. 40% to person A and 60% to person B.
Even successive/alternate nomination in life insurance is possible. This is nothing but the nomination order. e.g. nominate the money to person A. If he is not alive at the time of claim, it can go to person B. If B is not alive as well, it can go to person C. All the names of A, B and C need to be declared upfront at the time of successive nomination in life insurance. This is the best way to nominate and it is highly recommended.

What if One Makes No Nominations in the Policy

In case your policy fails to have a nominee, you need not worry, as the sum assured will be discharged according to the following rules -
The insurance company might dispatch the claim amount to Class I legal heir which includes- insured’s spouse, son, daughter, and mother.
In case of a Will, the process is followed according to the Indian Succession Act, 1925 where the claim amount is distributed according to what has been stated in the Will. A succession certificate from the court will be required, to have a clarification on whom to handover the claim amount.
Whenever there is more than one legal heir, insurer intents are to safeguard their interest in scenarios of dispute on settlement of the claim. For this, the insurer shall ask for an indemnity bond, joint discharge statement, and waiver of legal evidence.

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Insurance / Money tips - 08/20/2018