Forming a strong financial portfolio is crucial not just for the future financial goal achievement but also to rescue you and your family in times of financial emergencies. Thus, when it comes to investment in insurance, one should not just opt for the online term plan or regular term plan by approaching the insurer but also invest in guaranteed return plans like the endowment and money back policies for financial security.
Such guaranteed return plans are safe investment options offering dual benefits of both insurance and investment in markets. They come across as a great help in times of financial mismatches or shortfalls owing to their feature of provision to take a loan against them. However, before proceeding in depth to explain such insurance loan features and their importance, let us understand what is term plan? and how are they different from endowment and money back plans?
What is term plan?
Term insurance whether online term plan or those availed physically by visiting the insurer offers coverage for a specified time-period or a certain ‘term’ of years. In case the insured expires during the term tenure mentioned in the insurance i.e. the policy is active, or still in effect, a death benefit in the form of sum assured is paid to the insured’s dependents. One of the major term insurance benefits is that it provides higher sum assured at lower premiums than any other insurance plans. Other crucial term insurance benefits include availability of additional riders, critical illness coverage, accidental death benefit coverage and income tax benefits.
What is the difference between term and endowment/money back policies?
As stated above, a term policy offers only death benefit i.e. if the insured dies within the insurance tenure then a sum assured is given to his dependents and if he lives beyond the insurance tenure then no sum assured is given on his death. However, in case of endowment policy, the insured not just gets a portion of his premium during the insurance term but also his dependents get the sum assured on his death. And in case of money back insurance, the insurer pays a certain sum of money at periodic intervals according to the terms and conditions mentioned on the policy.
Loan against insurance – explanation
Loan against insurance can only be pledged against endowment and money back policies. Note that term insurance plans and ULIPs (Unit Linked Plans) usually are not accepted as a security/collateral for loan against insurance. To avail a loan on insurance, the policy should acquire a surrender value. Loan amounts sanctioned on them are generally 85 to 90 percent of the insurance surrender value.
In current times, loans against insurance are swiftly becoming a highly preferred solution to mitigate contingency expenses. It is primarily due to reasons of not just being a hassle free alternative but also due to their quick disbursal owing to their secured nature, availability at lower interest rate and lesser emphasis on credit score for loan approval. This said, there are few crucial factors to consider before moving ahead with loan against insurance.
Check if the sanctioned loan amount meets your fund mismatches completely
Firstly, ensure to check with the insurer the loan amount you are eligible for. This amount is usually a percentage of the surrender value. The loan amount can be up to 90 % against the traditional policy with guaranteed returns. In case the sanctioned loan amount does not meet your complete monetary requirement, you may avail the remaining fund proceeds through unsecured or secured loan.
Compare the charged interest rate with other loan options
The rate of interest charged in the case of loan against insurance is based on the premium paid and the remaining number of premiums yet to be paid. More the premium amount and more the number of premiums paid, lower is the interest rate charged. While owing to their secured nature the interest rate charged on loan against insurance is lower, it is always better to compare this option with other credit options. In case you find any other loan at lower interest rate than loan against insurance, you should consider checking the loan’s terms and conditions and opt for it only if it matches with your requirement.
Check if the waiting period of your insurance is over
A policyholder cannot avail loan against insurance right after purchasing the insurance. A waiting period of around 3 years is required to be met. This period is crucial for the insurers to understand your premium payment behavior, which helps them to decide if you are eligible for a loan based on the surrender value.