Can a life cover work as a collateral security for a loan? If yes, how much loan can I get?
Yes, most banks accept the Insurance Regulatory and Development Authority of India approve life cover issued by any life insurer as collateral/additional security for obtaining a loan provided the policy. Collateral security only helps in securing the loan and is usually not considered for determining the loan amount. The eligibility of a person for a loan is not decided on the basis of just one factor. Various factors such as his annual income, repayment capacity and value of primary security are taken into account. A loan against a life cover can be easily taken from the insurance company that mortgages the policy (subject to company rules). Life insurance companies such as LIC have laid down rules for granting loans against their policies after they acquire a paid-up value, that is, after a certain number of premiums are paid. Insurers restrict the amount of loan to 75-90 per cent of the paid-up value. A term policy, however, cannot be pledged.