The short answer to the question, “Can I take a loan against my insurance policy?” is no, although you may be able to use it as a surety for a home loan. So, what can you take a loan against and why doesn’t your policy have a cash value? We answer these questions below.
You can take a loan against an asset that can be turned into cash
When you take a loan against an asset, that means that the lender is guaranteed that they will be repaid. Either, you repay the cash you borrowed, or the lender can sell the asset for cash. These are known as secured loans, and the asset is the security.
For example: You borrow R10 000 and use your laptop as security for the loan. If you cannot repay the loan, the lender can keep the laptop and use it, or sell it to clear the debt.
Assets are things such as land, property, some investments such as unit trusts, valuable jewellery or artwork, some cars and appliances. When you use these as security, or collateral, the lender will value the asset based on the rand amount they will get if the asset is sold quickly. This is why in some cases even though your asset is worth R100 000, you can only take a loan of R70 000, because turning the asset into cash quickly may not result in the full value being paid.
What if you don’t have an asset for surety? Another person may stand surety for the loan. What happens is that you take a loan and a family member may agree to be surety, which is an agreement that if you cannot repay the loan, they will.
Another option, if you don’t have assets for surety, is an unsecured loan. That means that the lender agrees to lend you the money, even though you have no security for the loan. Interest rates on unsecured loans can be quite high because the lender has no security to turn into cash if you don’t pay back the loan. Their risk is higher, so they will demand a higher interest payment than with a secured loan.
An insurance policy is not an asset that can be turned into cash
Insurance policies are taken out for one purpose only – to pay a claim in the event that some incident or accident prevents you from earning an income. The premiums you pay each month go towards making sure the insurance company can pay these claims. Every month 1Life receives premiums and pays its customers’ claims from these premiums.
Your 1Life insurance policy is very valuable because it means your family can be taken care of financially if you are no longer around to provide for them. But your life cover cannot be turned into cash and has no value to anyone other than your beneficiaries, and only when you pass away. This means it cannot be used as surety for a loan.
Using life insurance as a surety for a home loan
In some cases, when you take a home loan, the bank or lender loaning the money will insist that you have life cover so if something happens to you your bond will be paid without the property having to be sold. In these cases you usually cede the policy to the bank or lender and if you pass away, they will receive the amount needed to settle the home loan from the insurance policy pay-out.
Life insurance is an investment in your family’s financial health
Life insurance is an important part of your financial plan. You may not be able to call it an asset in your balance sheet, but if something were to happen to you, your family won’t find themselves with too many financial problems. That’s a legacy that your family will always value.
There are many places you can get a loan if you need to such as banks that are registered credit providers and sometimes friends and family. Have a list of your assets (not your life insurance policy) ready when you take a loan in case you need to use them as collateral and make sure you know the terms of the loan such as the interest payable and date of repayment or repayments.