Q.8 What do you mean by life policy? Discuss its advantages and disadvantages? OR Explain the life policy? What are the precautions, which a bank should keep in view while advancing against the life policy as a security?
Ans: LIFE POLICY
It is contract between insurance company and certain person in which the insurance company promises to pay a stated sum of money either on his death or on his particular age but the premium must be paid for the duration of the contract. There are two methods of advancing loan against the Life Policy.
The banker can secure the loan by a deed assigning to the borrowing by mortgage.
The creditor may require depositing the life policy with reasons of deposit. The policy can be assigned when bank requires.
ADVANTAGES OF LIFE POLICY AS A SECURITY
Following are main advantages
- It is a simple method of security loans.
- The payment is safe even at the death of a person.
- The surrender value of the security increases with the passage of time.
- If the debtor refuses to pay than insurance can easily recover the loan from the company.
- It can be realized immediately from the company.
- It is a less expensive.
- There is no need of supervision of these securities.
DISVANT AGES OF LIFE POLICY AS A SECURITY
- If premium is not permitted then it is invalid.
- In case of suicide this policy is invalid.
PRECAUTIONS OF LIFE POLICY AS A SECURITY
A banker should keep in view the following precautions before advancing the loan.
- The life policy should be properly stamped.
- The financial position of the company issuing the policy should be examined.
- The banker must check the age of the policyholder.
- Premium is paid up to date or not.
- The reliability of the insurer must be examined.
- The banker should not advance the loan if notice of assignment has been served to insurer.
- The banker should take undertaking from ;he borrower that he will pay the premium regularly in time.
- In case of equitable mortgage the banker should take legal assignment by deed.
- The banker should not advance the loan if conditions in the policy are not acceptable.
- In case of joint policy the bank should get written permission from all parties.
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