The Long Read
Everything you *need to know* is right above this. Scroll down, only if you'd still like to read more (honestly, why?)
No, you cannot take a loan against a term insurance policy.
Simple. See, whenever you take a loan, you will have to provide the lender with collateral (i.e., a valuable asset or assets that they can take from you if you fail to repay the loan amount within the stipulated time).
In loans against life insurance, the policy value is accepted as collateral. The policy value is the amount you invested plus any returns earned on this investment. If you cancel a policy at any time or survive the policy period, you will receive the policy value back.
But in the case of term insurance, there is no such maturity benefit, which means you’ll get nothing if you survive the policy duration. So, if you don't repay your loan, the bank will get nothing from your term policy, if you are alive.
Therefore, in the absence of collateral, you can't get a loan against your term plan.
Some life insurance policies have a policy value, i.e., the amount you invested, plus any returns earned on this investment. This policy value can be received if you discontinue the policy or survive the policy duration.
That’s why you can get a loan against such policies, where the value of the policy will be accepted as collateral by the lender.
You can take a loan against some savings and investment - oriented life insurance plans that give you a maturity benefit.
See, choosing or not choosing a term policy should not depend on whether you can get a loan on it or not. A term policy is designed to help secure your loved ones’ financial future if you pass away, in an affordable manner. It is not intended to be a loan collateral tool.
What we advise is that if you want to secure your family’s financial future affordably, go for a term plan. If you want to take a loan, you could always use some other collateral (such as gold). But, if you really want a financial instrument that you can get a loan against, you could consider other tools, such as a mutual fund.
You may be able to get a loan if you convert your term plan to a life insurance policy. However, it is best to check with your insurer once.
Unfortunately, you’ll still not get a loan against your term plan. While you are likely to pass away by the age of 99, there’s still no guarantee that you’ll pass away then. In such a case, your term plan won’t provide any returns if you outlive your policy duration.
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