Taking a Loan to Pay Your Insurance Premium?
We already know that insurers provide loans against the insurance policies. Therefore, if you also have a traditional insurance policy as well as need short-term funds, you can very simply approach the insurance company to offer you a loan. If you can not simply repay the loan, the insurance company can also close the policy and recover the amount. There are some benefits to such loans.
Firstly, since the loan is very secured and thus you can also expect the rate to be very lower than the personal loan. Secondly, the process is likely to be very fast. Thirdly, the insurer does not pay very much attention to the credit score or repayment ability since this has a complete hold over the security and can very simply recover huge money in that case of default.
Availing a Loan to Pay the Insurance Premium
So, if the policyholder is struggling to pay a premium, the insurers are very quite willing to extend them a loan against their traditional policy. The policyholder can simply use the loan amount to pay the premium. For policyholders, this also helps them continue the policy and be on the track for his or her financial goals. For the insurer, this also helps them get the renewal premium. Moreover, this is virtually a risk-free loan for them as well as helps them earn interest income too. Also helps improve their persistency ratios.
Insurance companies would do what they simply want to do. The key is, what should or must you do? Should you simply avail of a loan to pay the insurance premium? By the best way, I am not just talking about this loan from the insurance companies. You can even take a personal loan to pay all the premiums.
Why Would You Not Renew Your Insurance Plan?
You do not renew the insurance plans for the following reasons or a mix of these types of reasons.
- You also forget about the annual premium since nobody simply followed up with you. Since the bulk of the commission is also upfront, the intermediary can not have very much of an incentive to follow up. Loans are no use in that case. You also need discipline.
- You also realize that you purchased the wrong product or policy. You do not want to continue. In that way, this also happens more often than you simply think. Loans have no role in that case either.
- You always think you are in the correct or right policy, but can not afford the premium. In that case, a loan to pay off the premium can be very useful. However, you also need to see if that affordability is a one-time issue or you had in the fact purchased an insurance plan beyond the means.
If affordability is a one-off issue due to some kind of unplanned expenses, you can simply borrow to pay the premium. However, if you simply purchased a plan beyond the means, this is better to surrender the plan. I simply understand surrender of plans might have heavy penalties involved. Moreover, the bulk of the hit also comes in the initial years. Due to that, you might want to simply continue with the plan. I always suggest you sit with the financial advisor to help you with the total cost-benefit analysis. At the time, you must or should understand you can not keep applying for the loan every year to pay this premium.
Taking a Loan for the First-Time Purchase
Always remember, taking the loan to purchase this policy for the first time is outright nonsense. So, this is the question of loans for paying insurance premiums shall not also arise for the first-time purchase. If you should or must take the loan to purchase a plan, then you should not make that type of investment. The only exception could be whenever you want to purchase term insurance as well as have run out of money due to some of the unexpected expenses. Since the premiums are not very much high, you can simply use a credit card to pay those types of premiums.
Always note, for first-time purchases, you should apply for a personal loan. An insurance company can simply offer you a loan only whenever you have the traditional plan with them. This is some other matter if you simply take a loan against the existing policy to purchase a very new policy.
What Should You Do?
Avoid all the mixing investments as well as insurance. Not only can these types of investments be very less optimal but can increase the premium liability. Bigger as well as binding annual premiums take away the flexibility. Had you kept all the investment and insurance separate; you would not likely find yourself in such a situation. Why? Because you can very easily pay the insurance premium from the pocket as well as reduce the investment amount for the year.
Purchase any term insurance plans. Always keep the investments separate. You will simply get better as well as very cheaper coverage and retain flexibility. This is less likely that you would require a loan to purchase or renew a term insurance plan.