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Go for fringe benefits in LIC offers.

ARE you stuck with an endowment policy from Life Insurance Corporation ( LIC) and don't know what to do with it? You know that the returns will not be more than 6% a year but cannot surrender the policy as that may mean losing 60- 70% premium that you have paid over the years.

The life covers that these plans offer don't have much to boast about either.

Ask any financial planner and he will tell you how you have erred by buying an endowment insurance plan instead of a term plan, a pure insurance product.

However, all is not lost. You can still salvage yourself partially by availing of the ' fringe benefits' of your LIC policy or any other endowment plan.

The biggest benefit of having an LIC policy is that you can take a loan against it at a reasonable rate. LIC offers loans against its policies at 10% a year. The interest is payable every six months.

The interest rate on loan against an LIC policy was 9% a year ago. It was increased to 10% around March 2012.

Usually, the interest rate on loans against endowment policies is benchmarked to the 10- year reference rate.

The interest rates can be 100- 200 basis points above the reference rate, which is a combination of prevalent rates on government securities and corporate bonds. Private insurers offer loan against endowments polices at a higher rate of 11- 14%. The loan amount can be up to 90% of the surrender value and bonus accrued. In paidup policies, the loan limit is 85% of the surrender value.

An endowment policy acquires surrender value after premiums have been paid for three years. It is 30% of basic premiums paid, excluding the first- year premium.

Premiums for riders such as accidental death benefit are not included in the calculation.

Considering that interest rates on personal loans are 14- 20%, a loan against endowment policy at 10- 11% a year is not a bad option.

Suppose you have taken a personal loan of ` 1 lakh at 15% a year for five years. Your monthly installment will be ` 2,650 and interest paid during the loan tenure will be ` 42,750. However, if the interest rate is 10%, the monthly installment will be ` 2,125 and the interest paid during the loan's five- year term will be ` 27,500. Thus, you save ` 15,000 by opting for a loan against the policy. Also, since these are secured loans, the documentation involved is minimal.

The minimum tenure of an LIC loan is six months.

The biggest benefit of having an LIC policy is that you can take a loan against it at a reasonable rate

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Publication:Mail Today (New Delhi, India)
Date:Nov 11, 2013
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