One of the many benefits of an insurance policy is the possibility of loans that it offers. Many Life Insurance policies give the policyholder flexible options of using their policies as collateral for loans. Seeking for a loan through an insurance policy is also known as pledging.
Benefits of an Insurance Loan
- Security: Your insurance policy serves as security for the loan, unlike in banks where opting for personal loans you must provide other assets as collateral before you can secure a loan.
- Easy Approval: Insurance loans are easily approved after a policyholder meets the requirements for the loan. After the surrender value of a policy has been evaluated.
- Constant Value: One tremendous advantage of these loans is its continuous value in the market, unlike the fluctuating nature of gold loans.
- Exempted tax benefits: Since loans aren’t recognized as income by income tax authorities, therefore it is exempted.
- Affordable Interest Rates: The interest rates on these loans are comparatively low than personal loans.
When can you get an Insurance Loan?
You can get a loan from your policy when you have built the cash value. You will have to contact your financial advisor or your insurance agent to evaluate your policy’s cash value. A proper evaluation will help determine whether you have to pay back the loan.
Loans from an insurance policy differ from personal loans and other bank loans. It’s not essential to pay back a loan on an insurance policy. However, the amount of credit you borrow may affect the policy’s death benefit. If you default on the loan payback and its interest, your policy could be at risk.
Getting a loan with your Insurance Policy
There are various kinds of insurance policies, but not all business insurance or life insurance policies offer the benefit of a loan. An example is term life insurance policy which doesn’t provide the benefit of a loan as it is an insurance policy without accumulative cash value.
So first, you have to be sure that the kind of policy that you have is eligible for loans. Once you ascertain your type of policy you have is suitable, you can go ahead to seek for loans as a policyholder. However, you’ll have to meet the criteria of the insurance company for approval. One of such measures will involve prompt payment of premiums among others. Here are four things to evaluate before you go through with the loan.
1. Discuss how the loan and interest will affect your policy and ensure that the overall death benefit of your policy is not threatened.
2. Find out what you’ll have to trade-off for the loan. If the criteria are unfavourable, it’s advisable not to go ahead with the loan.
3. Ensure you can afford to pay the loan interest and other fees attached to the loan clause.
4. Since borrowing reduces the amount of cash value and available collateral on loan, it is necessary to discuss with your financial advisor the details of the loan. As the reductions could be costly and leave you forfeiting your policy.
While some take insurance policies with cash value mainly to build assets on them and later on borrow on their policy as a form of investment, some opt for insurance loans to avoid the hassles involved in a bank loan.
An insurance loan is not a loan for just any situation. You should use it in emergencies or for investment purposes such as starting a business. Do not take out a loan without having plans for the big picture in mind and most especially before you take a loan, ensure you understand the complex aspects of it.
Insurance protects you in more ways than one.