Life insurance is a cornerstone of financial security for millions in India, but did you know it's a sleeping giant? A staggering ₹55 lakh crore is held in life insurance policies, as life insurance is a low-risk, tax efficient savings instrument. While it offers peace of mind, the average return on life insurance in India is circa 5%, which can be restrictive for your clients.
IRDAI data shows that over 40% of policyholders either surrender or allow their policies to lapse within 2 years of purchasing them. This is indicative of a need for liquidity access. However, as an independent financial advisor, you know that surrendering a life insurance policy, particularly early in its term, leads to terrible financial outcomes for your clients, with most losing part of the premiums paid-in, in addition to any accrued bonuses. To better assess the surrender loss for your clients’ individual cases, explore our surrender or not calculator, or contact Mera Kal for individual feedback.
In other instances, where liquidity is not a concern for clients, as a financial advisor you may be wondering how to make this asset class – whilst critical from a protection perspective, low yielding - more productive to optimise the overall portfolio?
Loans against insurance policies
A loan on an insurance policy allows policyholders to borrow against the cash value of their insurance to access this liquidity (typically up to 90% of the surrender value) without surrendering the policy and incurring a loss. This insurance policy loan option offers several advantages over traditional loans, including lower interest rates and the ability to keep their long-term protection and tax benefits intact.
What’s in it for your Clients?
Using life insurance policies as collateral offers several advantages:
- Avoid Surrender: Clients can access funds through a loan against their life insurance without surrendering their policy, ensuring they retain their insurance coverage and don’t incur any financial loss from surrender.
- Easy Access: Unlike traditional loans with stringent credit score and income proof requirements, loans against life insurance often require minimal documentation.
- Lower Costs: Interest rates on loans against life insurance are typically lower than unsecured personal loans, reducing the financial burden on your clients. At 10% interest rate per annum, this can can save them 5-15% in interest costs per year
- Flexibility: Insurance policy loans come with customizable repayment terms, allowing clients to tailor payments to their specific personal or business situation and cashflow. Most importantly, they don't require full policy surrender, ensuring continued coverage.
- Tax Benefits: The insurance portfolio is tax exempt, and taking a loan against it rather than redeeming, enables clients to continue to enjoy this benefit.
- Alternative to Gold: often the only viable alternative for clients to access quick liquidity no questions asked, is to pledge their precious gold. Life insurance loans offer a great alternative, allowing them to retain their family jewels.
What’s in it for You?
By incorporating borrowing against insurance policies into your services, you become a more valuable financial partner to your clients. You can:
- Expand your Business: Research shows that Indians appreciate dual purpose instruments. Introducing the ability to leverage insurance policies enables you to offer this dual function on part of your clients’ portfolio that need it the most. You can better offer comprehensive financial advice, as clients will often need some credit to complement their investment portfolio to achieve their goals.
- Increase Client Retention: A friend in need, is a friend indeed! Saving your clients from financial loss and offering more financially savvy ways to access liquidity and achieve their goals will no doubt lead to stronger and more loyal relationships.
- Grow Revenue: Reduced redemptions on the core portfolio leads to higher AUM. This, combined with attractive commissions for facilitating insurance policy loan transactions, creates a new revenue stream for your practice.
Loans against life insurance is a powerful tool that empowers both you and your clients. By incorporating it into your practice, you can unlock new possibilities, build stronger relationships, and achieve long-term financial success together.
Life insurance loans have hitherto been a cumbersome, manual process with insurance companies, limiting the potential for clients and advisors alike. With a completely digital fintech solution set to launch, this is an exciting opportunity for IFAs! Contact Mera Kal to learn more about it.