Life is unpredictable, and financial emergencies can arise unexpectedly. During such times, leveraging existing assets can be a crucial lifeline. One such asset is an LIC policy. Instead of surrendering the policy prematurely and losing out on long-term benefits, policyholders can opt for a loan against their LIC life insurance policy. This option provides immediate financial relief without the need for regular EMIs and ensures that the policy continues to offer life insurance coverage.
Key Features of an LIC Policy Loan
1. No EMI Requirement
One of the most significant advantages of taking a loan against an LIC policy is the absence of Equated Monthly Installments (EMIs). Unlike conventional loans, where borrowers are required to repay in fixed monthly installments, an LIC policy loan provides flexibility. Borrowers are only required to pay interest on the loan amount, and the principal can be repaid at any time during the tenure of the policy. This feature makes it easier for policyholders to manage their finances during emergencies without the added burden of monthly repayments.
2. Simple Documentation Process
Obtaining a loan against an LIC policy involves minimal documentation. The primary requirement is pledging the LIC policy document. This straightforward process eliminates the need for extensive paperwork, credit checks, and lengthy approval procedures that are typical of other loan types. The simplicity and speed of this process make it an ideal solution for urgent financial needs.
3. Competitive Interest Rate
LIC offers loans against policies at an attractive interest rate of 9.5% per annum, calculated on a daily basis. This rate is generally lower than the interest rates on personal loans or credit card advances, making it a cost-effective borrowing option. By leveraging the policy as collateral, policyholders can access funds at a more affordable rate.
Example of an LIC Policy Loan
Consider a policyholder with an LIC policy that has a surrender value of Rs 8 lakh. Facing an urgent financial need, the policyholder opts for a loan of Rs 4 lakh. With an interest rate of 9.5% per annum, the interest calculation is as follows:
The daily interest would be:
If the policyholder repays the loan after one year, the total interest paid would be Rs 38,000. The policyholder can repay the principal amount of Rs 4 lakh at any point, thus concluding the loan without any prepayment penalties.
Till the time, the policyholder clears the policy loan, the Policy bond will be with the Corporation only. On clearing, loan with interest only be given back to the policyholder.
Continuation of Life Insurance Coverage
One of the most reassuring aspects of taking a loan against an LIC policy is that the life insurance coverage continues uninterrupted. The policy remains active, and the death benefit is preserved. In the event of the policyholder’s death before the loan is repaid, the outstanding loan amount is deducted from the death benefit, and the remaining sum is paid to the beneficiaries. This ensures that the policyholder’s family remains financially protected, maintaining the core purpose of the life insurance policy.
Benefits of an LIC Policy Loan
Immediate Financial Relief: Quick access to funds in times of need without complex procedures.
Flexibility: No fixed EMI requirement, allowing for manageable repayment based on financial circumstances.
Lower Interest Rates: More affordable compared to other borrowing options like personal loans or credit cards.
Preservation of Benefits: Continuation of life insurance coverage and eligibility for bonuses and other benefits.
Minimal Documentation: Simple and efficient loan processing with the primary requirement being the policy document.
Conclusion
Taking a loan against an LIC life insurance policy is a prudent option for policyholders facing financial emergencies. It offers immediate relief with minimal documentation, competitive interest rates, and the flexibility of no EMIs. Most importantly, it allows the policyholder to retain the life insurance coverage, ensuring that their family remains protected. By opting for a policy loan instead of surrendering the policy, policyholders can manage short-term financial needs while safeguarding their long-term financial security and benefits.
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