Many people have lost their jobs as economic activities have almost stalled due to the nationwide loackdown that has been imposed to contain the spread of highly contagious Novel Coronavirus COVID-19. People facing job loss or salary cuts may be in financial distress and need funds urgently to meet their day-to-day expenses.

Unless you have large savings, sustaining would get tougher each passing day without a regular source of income. Once savings dry up, you may break your investments, unless you lose a substantial amount by doing so.

In absence of adequate savings and liquid investments, you may have to borrow money. For this you have to find the cheapest available source of taking a loan.

While loans against assets or securities come in a cheaper way, taking a personal loan is very expensive.

If you have taken an endowment life insurance policy, it may come to your rescue at this moment of crisis.

As surrendering an insurance policy may result in substantial loss, taking out a loan against the policy would be a better option.

Depending on the type and duration of a policy, you may take a loan against it either from a bank or from the insurance company that issued the policy.

Compared to taking a loan against an insurance policy from a bank, it is much easier and beneficial to take the loan from the insurance company.

The benefits of taking loan against insurance policy from the insurance company are as follows:

• The insurance company that issued the policy already has all the details of the policy holder, so no or minimum paperwork may be needed.
• The rate of interest on loan against an insurance policy is much cheaper than getting a personal loan.
• Unlike banks and other financial institutions, insurance companies generally don’t charge any processing fees to sanction a loan against policy to a policyholder.
• You may take loan against a single premium policy soon after issuance of the policy, while in case of regular premium policy, after the policy acquires surrender value. Surrender value increases as the maturity date of a policy nears.
• You may get a loan up to 90 per cent of the surrender value depending on type of a policy, which may vary from company to company.
• The insurance company may forfeit your policy only if the amount repayable – together with loan amount, interest and penalty, if any – gets closure to the surrender value.
• Unless forfeited, you would enjoy all the policy benefits, including the insurance cover. In case of death of the policyholder during the loan period, the insurance company will pay the sum assured to the nominee after deducting the unpaid loan amount with interest.

The point to be noted is that a loan may be taken against an insurance policy that has maturity/surrender value. So, no loan may be taken against a pure-risk policy like a term insurance policy.

• Financial Express
• 27/05/2020