Can a life cover work as a collateral security for a loan? If yes, how much loan can I get?
Ritu Trikha, Delhi
Yes, most banks accept a life insurance policy issued by any life insurer as collateral or additional security for obtaining a loan provided the policy is approved by the Insurance Regulatory and Development Authority of India (IRDAI). Collateral security only helps in securing the loan and is usually not considered for determining the amount of the loan. For deciding the eligibility of a person for a loan, various factors such as his annual income, repayment capacity and value of primary security are taken into account. It cannot be decided on one factor. A loan against a life insurance policy can be easily taken from the insurance company that mortgages the policy, subject to company rules. Most insurers 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.
