Pros and Cons of Using a Loan Against a Life Insurance Policy

Pros and Cons of Using a Loan Against a Life Insurance Policy

Not every borrower is aware of the benefits of a loan against the life insurance policy. It can be due to many reasons. The most common one of them being, it is their first time considering a loan against the life insurance policy.

A challenge that borrowers typically go through is researching regarding their chosen financing service. This increases the amount of time it takes to move forward with the application. Thus, the overall process becomes more lengthy and tedious.

To make sure that you’re able to apply for a loan against life insurance policy quickly, we have created a write-up. It will allow you to compare the pros and cons of this financing service to make a sound choice.

How to use a life insurance policy for getting a loan?

Have you been investing in a life insurance policy, for more than three years now? Then you can even use it to generate funds. It can be done by considering services like a loan against the life insurance policy. The service is provided by almost every bank and financing institute in India.

All you need to do is submit your life insurance policy papers, along with certain other documents. After this, the financing agency will conduct a verification process. Once done, you will be able to enjoy the benefits of a loan against a life insurance policy.

Moreover, a loan against a life insurance policy is also the quickest method of generating finance. It even requires minimum documentation, which is another benefit for borrowers. 

Pros of a loan against a life insurance policy

1. Quick process

The first benefit of using a loan against a life insurance policy is its quick process. Since the financing service does not require much documentation, the process gets completed almost instantly. Moreover, you will even be able to find the application process mentioned online for added convenience.

2. No credit check

The next reason or benefit of a loan against a life insurance policy is regarding the credit checks. With such a financing service, you are borrowing the funds against your own assets. Thus, the financing firm does not conduct a credit or background check. This means, even if you have a low credit score, you will be able to acquire a loan.

3. Lower interest rates

Whenever there is a guarantee provided along with the loan application, the interest rates automatically drop. The same is the case with a loan against the life insurance policy. Hence, you can utilize the loan for an extended period, without worrying about high-interest charges.

4. Flexible payment

The final advantage is related to the flexible payment system. You can either pay monthly EMIs or get the loan amount deducted from your maturity claim. This gives you full control of your financial situation.

Cons of a loan against a life insurance policy

1. Untimely death

The biggest disadvantage of utilizing a loan against a life insurance policy is to do with an untimely death. If the policyholder dies before repaying the loan, then the amount is adjusted from the death claim. This might affect the condition of the beneficiaries, who depend on the insurance policy amount.

2. Sitting interest

Sitting or accumulating interest is yet another disadvantage of a loan against the life insurance policy. In case you do not pay monthly EMIs, then the interest will keep adding to the loan amount. In such a case, if the sum exceeds the policy amount, then there is a chance of the scheme lapsing.

Bottom line: Taking a decision in haste or applying for a loan against life insurance policy without checking your loan eligibility irrespective of which credit scheme it is, can lead to unfavorable consequences such as degradation of CIBIL score. Thus, don’t ever apply for a loan without checking your eligibility in advance.

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