How To Use Your Life Insurance To Buy A House In India?

Owning a home is a cherished dream for many Indians, symbolising stability, security, and a place to build lasting memories. However, turning this dream into reality often involves careful financial planning and thoughtful decisions. Many opt for a home loan to ease the initial financial burden while gradually investing in their dream abode.

This is where life insurance stands by your side as a trusted companion, offering a unique avenue to secure the necessary funds for a home purchase. It not only bridges the financial gap but also ensures that your loved ones' future remains protected, adding an element of reassurance to your home-buying endeavour.

In this article, we'll explore how you can use your life insurance policy to purchase a house in India.

Using Life Insurance To Buy A House

If you're in need of funds but want to avoid putting your other assets at risk or liquidating your equity investments, you can turn to your life insurance policy for a loan. Your life insurance acts as collateral, ensuring a secured loan option. It's important to note that not all insurance policies qualify for loans. For example, term insurance plans don't have cash value and are not eligible for loans, as they solely offer a death benefit.

When you decide to obtain a home loan, you're taking on a new financial responsibility. Securing a life insurance policy to cover this loan ensures that in the event of unforeseen circumstances, such as your passing, your legal heirs will inherit the home without the burden of the home loan. This safeguards your family from the double impact of losing the primary income source and facing the risk of losing their home if there aren't enough funds to settle the remaining loan amount.

Taking a loan against your life insurance policy comes with significant advantages like you don’t have to put up any extra collateral to secure the loan, the interest rates are typically lower when compared to other loan options. You also have the option to use your life insurance policy directly as collateral for a loan with a financial institution like a bank, particularly when dealing with a substantial loan and your main goal is to safeguard your family from financial burdens during uncertainties. Essentially, you're leveraging the policy as security to obtain the loan.

If you're unable to repay the loan or if something happens to you before settling it, the financial institution can utilise the assigned policy to recover the remaining amount. Essentially, they can cash in the policy to offset the debt. However, if the loan is completely repaid, the assignment usually ends, and you regain full control of the policy.

How Much Money Can I Borrow From My Life Insurance?

The amount you can borrow hinges on the cash value your life insurance policy has accumulated. It also varies among insurance providers and banks. Typically, for plans with guaranteed^**returns, you can borrow up to 85% to 90% of your policy's surrender value. With ULIPs^*, your loan eligibility is based on the current fund value and the type of fund you choose.
It's important to remember that while you may be able to borrow up to 90% of your life insurance policy, it's not always advisable to do so. Overborrowing can potentially decrease your benefit values or even jeopardise your account.

Importance of Life Insurance When Buying a House

When you're in the process of buying a house, having a life insurance policy plays a critical role. If you were to pass away before paying off the mortgage, a life insurance policy could ensure that your dependents are not burdened with mortgage debt. Hence, life insurance acts as a financial safety net, protecting your loved ones from the financial stress of mortgage payments.

Buying A House With Life Insurance: Points To Consider

Here are some things to bear in mind before you use life insurance to buy a house - 1️. Eligibility When it comes to obtaining loans against your insurance policy, there are two distinct eligibility criteria to consider -

• Policy Eligibility
  The first step is to verify if your policy can be used as collateral for the loan you're planning to take. Policies that include savings features, such as endowment plans, money-back plans, or whole life plans, are typically eligible. In contrast, term plans are not eligible for loans. Additionally, you can only access the loan if your policy has a surrender value.

• Policyholder Eligibility
  Taking a loan against your life insurance policy is like borrowing from your own savings. This process typically doesn't involve stringent approval processes or depend heavily on your income for approval. However, your overall creditworthiness may still be considered. It's essential to thoroughly read the terms and conditions of your policy to understand the specific details regarding loans.

2️. Loan Amount
The insurance company sets both minimum and maximum loan limits, usually as a percentage of the surrender value, which can range from 85% to 90% for plans with guaranteed^** returns. If your ULIP^* includes a loan feature, the amount you can borrow depends on your existing fund value and the fund type. Once the loan amount is determined, the policy is pledged, transferring all rights to the lender, and the loan amount is disbursed to you.

3️. Interest Rate
The interest rate for a loan against your policy is influenced by the total premiums paid and their amounts. Generally, a higher number and sum of premiums lead to a lower interest rate. Additionally, these rates can fluctuate annually, so it's advisable to stay up-to-date on any changes to determine the current interest rate for the year you plan to take the loan.

4️. Documentation
The documentation process typically involves three key steps -

• Completing the designated application form provided by the insurance company or lender.
• Submitting the original policy document to the relevant institution from which you are obtaining the loan.
• Signing a deed of assignment that transfers your policy rights to the lender temporarily. Bear in mind that specific documentation requirements may vary between insurance companies, so it's advisable to inquire directly with your provider for detailed information.

5️. Premiums
It's essential to continue paying your policy premiums while the loan is active. Failure to do so may result in some insurance companies terminating your policy.

6️. Repayment Of The Loan
During the policy term, you'll need to repay the loan to the entity, and you have two options for repayment -

• Principal Amount + Interest: You repay the initial loan amount along with the interest during the policy term.
• Only Interest: If you choose to pay only the interest, the principal amount is deducted from the claim amount, and the remaining amount is paid as the maturity or death benefit. Keep in mind the potential impact of this deduction on your nominee's financial security if they depend on the full claim amount when you're not around. Approach repayment decisions with caution and ensure you're well-informed.

Note: If the accrued interest surpasses your policy’s surrender value, there's a chance you could lose the insurance coverage.

Can I Use My Life Insurance To Build Wealth?

Yes, there are various life insurance policies that offer savings or investment features to support your financial objectives.

For those seeking both wealth accumulation and life coverage, ULIPs* stand out as a favourable choice. Recently, ULIPs have become increasingly popular because they combine investment opportunities with insurance benefits in one comprehensive package. ULIPs grant you the flexibility to invest in a spectrum of funds tailored to your risk tolerance and financial aspirations, spanning from high-risk equities to more stable options like debts and balanced funds. Your choice of fund must align with your risk appetite and long-term financial objectives. By staying invested for an extended period, such as 10 years or so on, you increase the potential for substantial returns, particularly during favourable market conditions.

ULIPs^* offer enticing features like partial withdrawal, fund switching, etc., all while ensuring a lock-in period of 5 years. Plus, you can entrust the investment strategy to a dedicated fund manager, easing your investment journey.

How Long Does It Take To Build Cash Value On Life Insurance?

The timeframe required to build cash value in your policy varies significantly depending on the type of policy you choose and its specific terms and conditions.

Wrapping Up!

Using life insurance to buy your dream home can be a strategic move, but it comes with important considerations. While it can provide funding and protect your family, it's crucial to weigh potential drawbacks like reduced death benefits and policy lapses. Seeking guidance from a financial expert can help you decide if this approach matches your needs. With careful planning, your life insurance policy can be a valuable asset in realising your dream of owning a home.