Most people procure life coverage to secure the financial stability of their families in case of an unforeseen event. This is crucial to ensure that the policyholder’s family need not go through any financial difficulties while dealing with the emotional stress of his or her unexpected demise.
Life is uncertain and you never know when you need immediate funds to meet an emergency. You may avail of a loan on your credit card or opt for a personal loan. However, these are often modes of borrowing. Apart from these costly borrowing options, you can also avail of a loan against certain types of insurance policies.
While borrowing against life insurance policy may have certain advantages, remember it is still a loan and needs to be repaid. Failing to make timely repayments does have certain consequences.
Cash value in a life insurance policy
A term plan is a pure life cover that pays the policy benefits only in case of the demise of the insured during the tenure. Traditional plans pay not only the death benefits but also the survival benefits at the end of the policy term. This is because some part of the premium is used to build cash value in the life insurance policy.
With adequate cash value, you may use the same for the following purposes:
- Procure additional coverage
- Pay the premiums
- Withdraw cash, which is reduced from the benefits in case of non-repayment
- Borrow against the policy using the cash value as collateral
Borrowing against your life insurance policy
Whether you need money to pay bills or for your children’s education, a loan against the cash value of the life insurance plan may be used. Explained ahead are certain advantages thatthis kind of loan has over a loan against credit card or a personal loan.
- No need for credit checks
When there is adequate cash value, you may borrow without any difficulty. Furthermore, availing of the loan does not require following a long and cumbersome application procedure. Additionally, these loans are not reflected on your credit score, thereby not affecting the same.
- Lower rate of interest
Compared to a loan against credit card and a personal loan, the rate of interest on borrowing from a life insurance plan is lower. Therefore, it makes borrowing against the cash value of your policy more affordable and ensures you do not have any difficulty in paying the interest on time.
- No fixed repayment schedule
Based on your financial situation, you may repay the loan as per your comfort. In case you do not repay the loan, the same will be reduced from the policy benefits in case of an unfortunate incident or on maturity.
A loan against the cash value of life insurance is a good option to reduce interest costs. However, before opting for the same, you need to check the accrued interest and determine the repayment schedule based on your financial situation. Moreover, it is crucial you follow your repayment timeline to ensure your family does not suffer from financial distress in case something untoward happens to you.