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Taking loan against endowment Insurance policies

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Flexibility in repayment makes such loans good for home loan prepayment or credit card dues

Policyholders of traditional insurance plans, endowment and money- back, often realise late their policies are either too expensive or do not cater to their requirements. So, they let those lapse or acquire paid- up value. In the latter, they get some maturity benefit when the tenure of their policies is over.

But in endowment plans, there is another option they can use if premiums are still being paid: Raise cash by pledging their policies with Life Insurance Corporation of India (LIC), private insurers or banks.

The loans are cheaper, too. LIC's rate is 10 per cent whereas private insurers and banks charge 13- 16 per cent. In comparison, rates of personal loans are more than 14 per cent. While the rates are at par with private insurers and banks, there is more flexibility in repayment. You need to only pay the interest and the principal will get deducted when the policy matures or you pay the interest plus principal as an equated monthly instalment (EMI). The tenure of such loans can be as long as the policy. The amount you can raise is 70- 80 per cent of the surrender value. However, if the borrower is an existing bank customer, he can get a higher loan amount.  Such policies can be pledged for an education loan.

Such loans help specially if you have dues on credit card (interest rates of 30- 50 per cent annually) or want to part pre- pay your home loan. That is, when the interest rates are on the rise, banks increase your home loan tenure or EMIs. By pre- paying a small sum, you can keep the tenure or EMI same or even lower the burden.

If this is the only policy that one holds, it makes little sense to pledge. If the policyholder dies during the repayment period, the nominees will be paid the remaining sum after deducting the loan dues plus interest (up to date of claim). To avoid such situations, it would be better if the policyholder takes the EMI option (interest plus principal) instead of the only- interest option." Financial planner Gaurav Mashruwala advises you to buy a term insurance policy as life cover. Buyers, however, saddle themselves with a number of other traditional and unit- linked insurance plans (Ulips) as investment- cum- insurance and for taxation. In the former, the returns are five- seven per cent, much less than fixed deposits. If the money were with Kotak or YES Bank, they would still earn six per cent returns.

As far as tax benefits go, life insurance is a part of Section 80C limit of ₹ 1 lakh in which there are many other options like employee provident fund, public provident fund, equitylinked savings schemes, home loan principal payment and others. If one manages the other heads well, there will be little need to buy an endowment policy for tax needs.

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