Insurance plans are a hard-to-miss investment in today’s day and age. While you might be diversifying your investments using a well-crafted financial plan, a life insurance policy helps to provide security to your financial dependents in your absence.

There are a plethora of policies that you can choose from. But if you want savings along with protection for your life, an endowment policy is a suitable choice.

What Is An Endowment Policy?

An endowment plan is a life insurance policy where the insurer offers dual benefits of savings and protection in one plan. This life insurance plan aids in not just providing protection for your life, but also accumulating savings that can be used to meet long-term financial goals.

Further, an endowment cover also provides survival benefits where the insurer pays an assured sum if the policyholder outlives the policy tenure. This lumpsum payment at the end of the policy tenure can be used to fund your child’s education, buy a house or simply serve as a part of your retirement corpus.

Loan Against Endowment Plans – Meaning

While endowment plans provide financial protection for your dependents, they also have a special feature wherein in times of financial crunch, it can be used to raise funds. This is possible by way of obtaining a loan against your endowment policy.

Loan against a policy is not an exclusive feature of an endowment plan, but all life insurance plans that have an underlying value. So, a term insurance plan that focuses on providing pure life insurance cover cannot be used to avail any loan. Traditional plans like the money-back plan or an endowment plan have a guaranteed return on investment, and hence, are eligible to avail a loan. However, ULIPs which do have an underlying value are barred from giving loans against the rules of the regulator, the Insurance Regulatory and Development Authority of India (IRDAI).

Eligibility For Loan Against Endowment Plans

When it comes to seeking emergency cash advance by way of loan against your life insurance plan, there are certain rules. For instance, a loan cannot be availed immediately once you have bought the insurance plan. Instead, such a loan can be extended only when the policy has acquired any surrender value. This generally happens within two or three years since the policy has been purchased. For instance, the tenure of an endowment plan is 10 years, then the policy acquires any surrender value at the end of three years.

Quantum Of Loan Offered Against Endowment Plans

The loan that is offered against such an endowment plan is a percentage of the surrender value and not the sum assured. Depending on the insurance company, the amount of loan can range between 70% to 90% of the surrender value of your policy.

Further, there are two types of surrender values. One is the minimum guaranteed surrender value and it is stipulated by the law, whereas the other is a special surrender value which indicates the value of your investment. During the initial years of your policy, there is a difference between the two; however, as the policy ages, the special surrender value is higher than the minimum guaranteed surrender value. The insurance companies offer a loan on the higher surrender value of the two.

Repayment And Interest Rate Of Loan Against Endowment Plans

The rate of interest charged on such loans is around the rate of Government securities issued and depends on the market dynamics. It is important for you to at least pay the interest on such a loan. The principle on this loan against life insurance can be either paid during its tenure, or have it adjusted from the maturity corpus, or the death benefit payable to the nominees. Even if defaults are made on interest payments, the policy remains active till the time the surrender value of your endowment plan is higher than the principle plus its accumulated interest. Only after it crosses a certain threshold, the policy is foreclosed, and the insurance company recovers its dues.

This loan facility against your endowment plan makes sense if your creditworthiness is low or if interest rates on personal loans are available at a much higher rate.

When comparing different insurance policies, a life insurance calculator can come in handy. Using this nifty tool, you can compare the endowment plans based not just its price, but also the features it offers. Hence, a life insurance calculator must be used before you have finalised on any insurance plan you buy.