Low credit score? Go for loan against insurance policy

Expect smaller loan approvals in policy's early years, which may necessitate selling of investments instead

- BINDISHA SARANG

New regulations on the surrender value of insurance policies have come into force from April 1. Surrender value is the amount paid by an insurance company when a customer ends a policy before maturity. Under the new guidelines released by the Insurance Regulatory and Development Authority of India (Irdai), a life insurance policy's value is likely to be lower if it is surrendered within three years, and higher if it is surrendered between the fourth and the seventh year. Experts are of the view that if you need funds, you should avoid surrendering your policy and instead avail of a loan against it.

In insurance, a long tenure holds the key. Substantial benefits typically accrue only after 20 to 30 years. That is why insurers and experts recommend taking a loan instead of surrendering the policy.

Only some policies are eligible

Loan against insurance is available only against a few types of policies.

"If an individual owns a traditional life insurance policy with a savings component, such as an endowment or a moneyback plan, they can utilise it to obtain a loan for various financial purposes," says Vignesh Shahane, managing director and chief executive officer (CEO), Ageas Federal Life Insurance. He adds that term plans, which only provide a death benefit and lack cash value, are ineligible. Similarly, unit-linked insurance plans (Ulips) may also not qualify due to their returns being tied to the stock market.

Who offers these loans?