Can I use my life insurance policy as a tool to secure loans?
Ravi Senapati, Bhopal
The use of a life insurance policy to secure loans is very common in the present scenario. The interests of the creditors, as well as the debtors, are secured in such cases. There are, basically, two types of credit insurance. The first type is a policy taken by the creditor in the name of the debtor and secures his loan money. The value of the policy in this case does not normally exceed the amount of loan (including the amount of premium plus interest, thereupon that he shall have to pay to keep the policy in force). The second type is a policy taken by the individual himself. In this case, the life insurance policy is given as a collateral security for taking a loan. Generally, this is done through the assignment of the policy. Under assignment of a policy the rights and benefits under the policy gets legally transferred to another person or entity.
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In this case, one can assign the policy in the name of the bank which is providing the loan facility by pledging the policy with the loan provider as collateral security. The general rule is, on payment of the debt, the creditor loses all interest in the policy and the policy is restricted for the benefit of the insured, and is collectible by him or his family (executors).
Also, in case, the value of the life insurance policy exceeds the amount of the loan, the balance money, after the repayment of the loan to the creditors, gets paid to the beneficiaries of the insured.
