It is common to hear individuals in India talk about a variety of various forms of loans, but it is uncommon to hear them discuss loans secured by insurance policies and provident funds. One major cause for this is a lack of awareness about these two products, while another is India’s low insurance penetration, which is far lower than the global average.
So this article will walk you through the credit option of a Loan against LIC and the benefits you can get by availing of it. Besides that, another lesser-known credit option in the form of a Loan Against EPF will also be discussed in this article.
What is a Loan Against Insurance Policy, and how does it work?
A loan against LIC is issued by the insurance firms themselves, as well as by any other financial institutions that provide loans secured by securities, including banks. Because you are not required to submit any other assets as security, this form of loan is advantageous for loan applicants who got rejected for a personal loan. And it involves less risk because of its secured nature.
As a result, rather than taking out personal loans or taking out loans against your credit cards, you can borrow money from your insurance policy.
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Insurance Policies that are eligible for a loan include the following:
There are some types of life insurance policies that cannot be used to secure a loan against LIC. As a result, it is preferable to check with your insurance company before purchasing a policy. Policies such as a whole life policy, a money-back policy, and an endowment plan, on the other hand, allow you to borrow against your life insurance policy. Depending on your insurer, you may be able to obtain a loan against your ULIP policy, also known as a Unit-Linked Insurance Plan (ULIP), at times.
What Are the Advantages of Taking Out a Loan Against Your Life Insurance Policy?
A loan against LIC has a number of advantages, the most notable of which are as follows:
- Interest rates are on the lower side
When compared to the interest rate levied on a personal loan, the interest rate on this sort of loan is far less expensive.
- Quick Disbursement of loan
Because the documentation is simple, the loan payout is expedited, and only a limited amount of application processing is necessary.
- Fewer chances of being rejected
Unlike unsecured loans, the likelihood of your loan application of Loan against LIC being denied is quite low due to the fact that you have existing insurance coverage with the insurer.
- Less scrutiny
Because your life insurance policy serves as collateral for the loan, the insurance company is less scrutinised. The loan is also sanctioned without a thorough examination of your credit report, which is advantageous if your credit score is below average.
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Now let us talk about loan against EPF.
A retirement benefits system recognised by the Indian government, the Employee’s Provident Fund (EPF), is offered to eligible salaried individuals employed in the country. Both the employer and the employee contribute equally to this fund, which provides tax savings benefits and can be taken with interest at the time of retirement, according to EPF regulations.
In situations where a person may want money to get out of a difficult financial situation, this Loan Against EPF can be extremely beneficial. EPFO (Employees Provident Fund Organization) authorises emergency withdrawals from EPF accounts, which are also known as Loan Against EPF or EPF Advance, to assist account holders in such instances. The major components of the EPF loan are explored in greater detail in the following sections.
Remember, a non-refundable advance up to three months’ basic wage and dearness allowance or seventy-five percent of the EPF account balance, whichever is less, has been granted to all EPF subscribers in India as a result of the COVID-19 pandemic and shutdown, which has resulted in income losses for many salaried individuals. Detailed information about this EPF advance may be found in the COVID-19 Emergency Advance section.
Interest Rates on Loan Against EPF
EPF Loan is basically a premature withdrawal from the EPF, and as such, it is not required to be repaid, in contrast to a PPF (Public Provident Fund) loan, which is. As a result, there is no interest rate associated with it. It is calculated in terms of the amount of interest that you could have earned on the cash taken if you had not made the withdrawal, which is the cost of this loan. Currently, the interest rate on EPF deposits is computed based on the monthly running balance, and the current rate is 8.5 percent per annum (as of FY 2021-22).
What more to know about EPF advance under Covid
EPFO has inserted a unique provision in the EPF Act to grant a non-refundable COVID-19 emergency advance in order to maintain cash flow and liquidity in the hands of EPF subscribers during this difficult time of Coronavirus illness outbreak and lockdown.
Eligibility for COVID-19 Emergency Advance: All EPF members employed in a factory or establishment located in an area that has been declared by the appropriate authorities to be affected by the COVID-19 epidemic are eligible. Given the fact that COVID-19 has been designated a pandemic affecting the entire country, all employees across India are currently eligible for Loan Against EPF under the current circumstances.
Documents Required for COVID-19 Emergency Advance: COVID-19 Emergency Advance Request Form There are no documentation or certificates that must be supplied by either the employee or the employer in order to make use of this benefit.
COVID-19 Emergency Advance Quantum: COVID-19 Emergency Advance Quantum: You can take advantage of the non-refundable advance up to the sum of three months’ salary and dearness allowance, or up to 75 % of the available balance in your EPF account, whichever turns out to be lower.
Please keep in mind that the withdrawal is non-refundable, which means that you will not be required to pay back the money and that there will be no interest charged.