Loan or partial withdrawal: How to borrow from your insurance policy?

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Often at the time of need, we consider dipping into our insurance policies to fulfil short term needs. However, before we get into the needs aspects of these plans, a distinction between them is fundamental. While you can take loans against endowment policies, unit linked insurance plans or ULIPs allow you to make partial withdrawals when in need of cash.

Loan or Partial withdrawal

A loan against a traditional insurance policy is available where the policyholder has completed at least 3 years. “A policyholder can get the loan against the guaranteed plans wherein the loan is given on 30% of surrender value. The plan must have completed 3 years at least in continuation as the surrender value is generated after the completion of 3 years,” Naval Goel, Founder & CEO, PolicyX.com.

He explained: for instance if a policyholder is paying Rs 1 lakh for insurance annually and already paid Rs 5 lakh in 5 years of duration then the surrender value would be Rs 3 lakh and the loan will be given 30% of Rs 3 lakh. Having said that, traditional policies are long term commitments, and experts say one should never buy an insurance policy to use it as collateral against a loan.

Partial withdrawal is allowed in ULIPs after 5 years. “Partial withdrawal is an entirely different concept that is available in ULIP plans. As the name states, partial withdrawal means taking advance money from own accumulated fund value before the policy tenure is over. However, the withdrawal is permitted after the completion of 5 years of the policy,” said Goel.

Cost involved

From a cost-effectiveness point of view, loans against insurance policies are the least cost-effective way. The surrender value of your policy depends on how long you’ve held the policy. “The interest rate varies from bank to bank but it generally ranges between a minimum of 8% to a maximum of 15%,” said Goel.

Partial withdrawal and money backs have are comparatively more cost-effective. “The return of an insurance policy is not affected due to the loan as the loan is taken from the external source and in the case of partial withdrawals, the policyholder gets the pending amount post partial withdrawal,” said Goel.

What to do?

If short term liquidity is a need, then experts suggest going for partial withdrawal in ULIPs. You can withdraw post 5 years as long as you maintain 1 or 2 annual year premiums. But this may vary from policy to policy. Moreover, the facility of loans and partial withdrawals are not available on all policies.

“Generally, loans are not recommended because the value of the loan i,e, 30% is quite less for the loan. And the policyholder has to pay the premium of the policy as well as the interest of the loan which can become a little heavier on the pocket of the policyholder. But partial withdrawal is still recommended because it is likely taking your saving in advance and it doesn’t lay any kind of burden on the policyholder,” said Goel.