What to Keep in Mind When Taking a Loan Against Insurance Policy Through Aadhar Card Loan

General

Anyone can experience a financial emergency, so you should be ready with backup plans in case your savings are insufficient. A personal loan like 10 lakh loan is one of the possibilities that typically comes to everyone’s mind, but is it the best option? However, keep in mind that a personal loan has a higher interest rate and should only be used as a last resort if you have no other options. You can obtain a loan against your LIC or other insurance policy, assuming you have one, as an alternative to choosing the pricey credit choice. When funding non-emergency requirements or for emergencies, insurance policies allow policyholders to use aadhar card loan. The use of a borrowing against insurance has some benefits and drawbacks. Let’s carefully understand them before you seek for such a loan:

You’ll be able to obtain a loan with a high value: A maximum loan of 80–90% of the policy’s surrender value may be obtained against a LIC insurance. This is especially advantageous if you lack or have a low credit score, which will already limit your capacity to obtain a greater loan amount. For the uninsured, surrender value is the amount received when an insurance policy is voluntarily cancelled by the insured. For instance, your insurance policy has a surrender value of Rs. 20 lakh and a cover amount of Rs. 50 lakh. You should have no trouble obtaining a loan of approximately Rs. 18–19 lakh when applying for an insurance loan.

The loan will have a low interest rate for you: One of the main benefits of using an insurance loan is that you may get a 10 lakh loan at a reduced interest rate, which is preferable given that banks always charge interest rates that are on the higher end. However, one should be aware that the aadhar card loan interest rate on your LIC policy is determined by the policyholder’s previous premium payments and the frequency of those payments. Pro tip: The interest rate at the end will be lower the more premium is paid and the more times the policyholder is paid. The wealth from the insurance policy that serves as collateral may also be the cause of the reduced interest rates.

Additionally, secured loans will always have cheaper interest rates than unsecured ones.

easily reachable Due to the little paperwork and lack of documentation required from the policyholder, a loan against a LIC policy can be relied upon simply in times of financial necessity. This cannot be true for an aadhar card loan or a personal loan, which require documentation of your income, a CIBIL score, and your employment history. A financial institution uses these criteria to determine a borrower’s capacity to repay a loan without defaulting. Given this, when seeking for a 10 lakh loan with the least amount of paperwork, a loan against a life insurance policy wins out over other lending options on the market.

Limited examination by the lender or bank: Policyholders are provided a loan against their LIC policy in exchange for collateral (surrender value). In the event the policyholder defaults on the loan, your life insurance policy is pledged as collateral. One receives a reduced interest rate due to this. As a result, the lender performs little due diligence, which enables speedy loan disbursement. This is not achievable with a personal loan or other sort of loan because your credit score and your employment history will be carefully examined to determine your ability to repay the loan.

Cons of Getting a Loan for Insurance

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In the initial years, a bigger loan amount is not possible to obtain: Most individuals think that an insurance loan can only be used to offset the policy’s sum assured. But that’s not accurate. You will only be approved for the aadhar loan on your insurance policy based on your surrender value. A policyholder must wait years to build up a sizeable surrender value before they may use it as collateral for a 10 lakh loan. As a result, the policyholder is only able to borrow a reduced amount against life insurance policy during the initial term after obtaining the policy.

There is a common assumption that loans may be obtained for all sorts of insurance plans, but this is untrue. A term plan cannot be used as collateral for an insurance loan; only standard life insurance plans can be used. Traditional plans that have a guaranteed return component include endowment, money-back plans, whole life, etc. However, only a few life insurance providers also offer loans secured by unit-linked insurance plans, or ULIPs.

There is a waiting period: As soon as one purchases the insurance policy, they are not immediately qualified for a loan. There is a three-year waiting period. The purpose of the period is to determine if you have defaulted during the three-year waiting period or have made regular premium payments. This will be taken into consideration while granting you the loan.

Loan repayment default: If the policyholder fails to make loan payments or future premium payments for their insurance, the policy will expire. As a result, the insurance company is obligated to take the principle and interest owed from the policy’s surrender value.

You must confirm with your insurance company whether or not your policy qualifies for an aadhar card loan on your insurance policy. You should be aware that the maximum loan amount you can get will be between 80% and 90% of the policy’s surrender value. The amount you have available to you for a 10 lakh loan, however, will be much less if you took a loan during the policy’s initial period of coverage. Overall, getting a personal loan is still preferable to taking out a loan against a life insurance policy. It is advised that if you need a loan, you try to get it directly from the insurance company rather than going to a financial advisor. The reason for this is that if you choose the insurance, you will have some wiggle room regarding the repayment schedule and may be able to negotiate a lower interest rate.