Now you can take a loan against your Ulip

Now you can take a loan against your Ulip

The Insurance Regulatory and Development Authority (Irda) has allowed insurers to give a loan against a unit-linked insurance plan to their policyholders.

 

LOAN ON INSURANCE Loans are given on insurance-cum-investment policies primarily because these have a surrender value or the value you get back in case you decide to discontinue the policy.

 

Typically, on traditional policies not linked to the market, insurers give a loan of up to 75% of the surrender value. If the policyholder defaults on the loan, the insurer could recover the dues from the surrender value.

THE EARLIER NORM When Ulips--the market-linked version of insurance-cum-investment policies--were launched around 2001-2002, the loan on such products became difficult to get. The policies were market-linked and had no strict lock-in period, which meant that the surrender value could dwindle depending on mardwindle depending on market conditions. Therefore, giving a loan against a Ulip was risky for insurers and they never approved such a loan.

 

What was the norm soon became a rule. In 2005, Irda guidelines said insurers could not give a loan to a policyholder against Ulips. THE NORMS NOW In order to provide more liquidity to investors, Irda has now allowed loans on Ulips since their lock-in period has been increased from three to five years.

 

However, Irda has specified the maximum amount of loan that can be given on a Ulip. As per the new norms, the loan amount cannot exceed 40% of the net asset value (NAV) in Ulips where equity accounts for at least 60% of the total share.

 

The amount can't exceed 50% of the NAV in Ulips where debt instruments account for at least 60% of the total share.

 

LOAN FEATURES You can take a loan any time during the tenor of the policy up to the limit mentioned above. It works like a personal loan with the exception that the interest rates are much lower in it since it is a secured loan. You can repay the loan either through equated monthly instalments or in a lump sum.

 

Risk: When you take a loan against your insurance policy, you assign the policy to the lender, in this case your insurer. So, if th policyholder dies, the insurance company will use the sum assured to offset the outstanding loan amount and will give the remaining to the beneficiary.