Rakhee had taken an insurance policy while she was employed in a bank. But when the recession struck, her bank started laying off staff. Rakhee was one of the employees who was laid off. Since she was not skilled in other areas, she found it tough to make her ends meet. Owing to her financial crisis, her broker advised her to sell off the insurance policy and raise cash. It was here that her insurance policy helped her tide over the tough times.
Definition of insurance policy
A life insurance policy is a means of enjoying a blend of good and long term investment returns, security against life's problems and healthy tax advantages. Hence it is advisable to hold the policy till it matures in order to fulfill the aims with which it was purchased.
The need to sale off the insurance policy
While it is advisable to hold the insurance policy till its maturity, it is not always possible. Life throws up some unexpected challenges, and so we are forced to sell the policy, in order to raise cash to tide over these emergencies.
How to raise cash from your insurance policy
According to the Transfer of Property Act 1874, a life insurance policy is considered as a movable property. So as in the case of any movable property, there is a value assigned to the insurance policy. This value is decided by the cash value of the policy at any given point of time. This makes it an ideal collateral for raising cash from leading lenders, and you can get a loan against it. If your policy is market-linked, you can surrender a portion of the cash value if you want to meet cash requirements. In case of traditional insurance products, the policy has inbuilt loan facility that is given against its cash value. The quantum of loan that you can get varies, depending on the value of the policy, but is normally restricted to 80-90 per cent of the policy's surrender value.
The positives of selling your insurance policy
The first important advantage of a partial withdrawal or surrender of a life insurance policy is that the amount you get does not attract tax. But always take care to ensure that the sum assured of your policy is at least 5 times the annual premium in order to enjoy the tax benefits. In case of a traditional policy, you can get the loan from your insurer at a far lower rate than that given by other lenders. However it is based on the guidelines of your insurer and they vary amongst the insurance companies. If you have a with profits policy, you will continue to share in the profits of your insurer, thus ensuring you continue to enjoy the policy benefits. Loan against insurance policy is the most simplest and hassle free method of obtaining loan. There is no processing fee or prepayment penalty involved in the process. You can repay the principal amount or get it adjusted against the cash value of the policy on maturity, making the repayment process easy. If the policy is market-linked, you can make more than one withdrawals during the policy year, thus providing you liquidity wherever needed. In this case, the withdrawal is not regarded as a loan.
The downside
If you think that taking a loan against your insurance policy is all roses, then you are wrong. It does have its share of drawbacks. For one, the value of the policy will depend on the number of years the policy is running. Longer the period, higher the cash value. It also depends on the performance of the insurance company. E.g. if you need cash within 5 years of taking the policy, you will be unable to get any loan. But after 10 years, you can easily get liquidity. Moreover there is a lock-in period of 3 years, before you are allowed to withdraw money or the policy gets a surrender value. This is applicable more for unit linked policies. The highest loan amount you can get is limited to 80 - 90 per cent of the surrender value of the policy. There is a likelihood of increase in the interest rate on the loan. In case of market-linked policies, partial withdrawals incur high withdrawal charges during the first years.
Repaying the loan
In case of market-linked policies, you need not repay the loan. In case of traditional products, you can either pay back the loan amount along with the interest or adjust it against the policy's maturity value.
Insurance policy is an important asset that helps you save money, get tax benefits and combat life's problems. It is also a good tool to get a low interest loan in case of financial crunch. However you need to weigh the pros and cons of selling your policy before finally deciding to sell it.
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