When you are in a financial crunch but you don’t want to sell your investments. Under the circumstances, assets such as property, shares, mutual fund units, insurance policy, etc. can be pledged. Let’s see here against loan on insurance policy.
Though Life insurance policies are meant to provide a cover against the sudden demise of the policyholder to their families, these can be pledged to raise money during emergencies. When you pledge your insurance policy, you get a long repayment tenor as you have time till its maturity and can also settle it on its maturity.
This loan is considered a secured loan. Hence, interest on the loan on insurance policy is lower than the other alternatives. Normally, when you go in for a loan, there is a verification procedure and background check which is not needed in case of an insurance policy. It is also to be noted that the policy value will not change according to the market conditions. Hence, it provides an edge over pledging shares or gold.
A loan on insurance policy is offered on all the insurance policies except the term insurance. But you can avail loan only after three years of paying your premium. Normally, 85-90% of the surrender value will be paid as loan amount. After deciding the loan amount, the lien on the policy is made in favour of the lender. Income Tax authorities don’t consider this loan amount as income. Hence, not taxable. You can comfortably repay the amount over the years though you will have to pay the premium all through these years.