Life insurance policies are traditionally viewed as a means to provide financial protection to your dependents in the event of an untimely death. However, many people are not aware that some life insurance policies can also serve as a financial tool during emergencies. One such option is a loan against insurance policy, which allows policyholders to borrow money using their life insurance policy as collateral. It is a secured form of borrowing that helps you meet urgent financial needs without compromising your long-term insurance cover.

This article explores how loans against insurance policies work, the eligibility requirements, interest rates such as the LIC policy loan interest rate, and whether this option is suitable for your specific financial goals.

What is a loan against an insurance policy?

A loan against insurance policy  is a credit facility that allows the policyholder to borrow funds from the insurer or a bank by pledging their life insurance policy. The policy should be a traditional savings-oriented life plan like an endowment, whole life, or money-back policy. These policies accumulate a surrender value after a few years of premium payments. This surrender value serves as the basis for the loan amount.

When a loan is approved, the insurer places a lien on the policy. This lien prevents the policyholder from surrendering or making changes to the policy until the loan is fully repaid. However, the policy remains active and continues to accrue bonuses and insurance coverage.

 

Eligibility for taking a loan against an insurance policy

Not every policyholder or insurance policy qualifies for a loan. The eligibility requirements depend on both the insurer’s rules and the nature of the policy.

● Only life insurance policies with an accrued surrender value are eligible for loans. These include endowment plans, money-back plans, and whole life policies.

● Term plans do not qualify because they do not accumulate any surrender value.

● The policy must be active and should have completed the minimum duration set by the insurer, usually two to three years.

● The applicant must be the policyholder or a legal assignee of the policy.

● Policies bought from public insurers such as LIC, or reputed private insurers, may come with different terms, so it is important to verify the lender’s eligibility criteria.

 

Loan amount and surrender value

The loan amount is primarily determined by the policy’s surrender value, which reflects how much the policyholder would receive if they voluntarily terminate the policy. The longer the policy has been active and the more premiums have been paid, the higher the surrender value.

● Lenders usually offer 85 to 90 percent of the surrender value as the maximum loan amount.

● The percentage may be lower for paid-up policies or those that have discontinued premium payments.

● Additional components like bonuses or riders may or may not be included in the value calculation depending on the insurer’s rules.

For example, if your policy has a surrender value of Rs. 3 lakh, the eligible loan amount could be between Rs. 2.55 lakh and Rs. 2.7 lakh.

 

LIC policy loan interest rate and its implications

The LIC policy loan interest rate plays a significant role in assessing the affordability of this borrowing option. Since the loan is secured by an asset with guaranteed value, the interest rate is generally lower than unsecured personal loans or credit card debt.

● As of recent policy updates, LIC usually charges an interest rate of around 9 to 10 percent per annum.

● The interest is computed on a half-yearly or annual basis, depending on the terms agreed upon at the time of loan disbursement.

● If interest payments are not made on time, the amount may be added to the outstanding principal, increasing the repayment liability.

● In the event of non-repayment, LIC has the right to recover the loan amount and outstanding interest by deducting it from the policy’s maturity or death benefit proceeds.

Private insurers may offer similar loans, but their interest rates could vary between 9 and 12 percent, depending on the surrender value, duration of the policy, and customer profile.

 

Advantages of choosing a loan against insurance policy

Loans against insurance policies are particularly useful for individuals who want to maintain their insurance coverage while accessing immediate funds. Some key benefits include:

● The process involves minimal documentation and no credit checks, making it accessible to individuals with limited credit history.

● Interest rates are typically lower compared to unsecured borrowing options like personal loans.

● The loan does not affect the policy’s maturity benefit as long as repayments are made.

● You continue to enjoy life insurance protection, and in most cases, bonuses continue to accrue.

● Loan approvals are faster, and disbursements may occur within a few working days.

● Unlike other secured loans, you do not need to provide any additional collateral.

 

Disadvantages and risks to consider

While loans against insurance policies offer multiple benefits, they also carry certain risks and limitations.

● If the loan is not repaid, the insurer can deduct the outstanding dues from the death benefit or maturity proceeds, which reduces the final payout.

● Taking repeated loans against the same policy may affect its long-term value and performance.

● Policies with low surrender value offer limited loan amounts, which may not be sufficient for large expenses.

● Defaulting on loan repayments may also affect the policy’s continued validity or reduce its bonus component over time.

It is advisable to use this facility only for genuine financial needs, such as medical expenses, education fees, or short-term business requirements.

 

When is this loan option suitable?

A loan against an insurance policy is most effective in scenarios where liquidity is required urgently but the borrower does not want to compromise their long-term financial security. This could include:

● Covering temporary cash flow gaps in a business or self-employment scenario.

● Paying for urgent medical treatment or emergency travel.

● Avoiding high-interest credit card or personal loan debt.

● Preventing premature closure of long-term investments during market downturns.

In such cases, pledging your insurance policy provides access to funds while protecting your future financial stability.

 

Conclusion

A loan against insurance policy is a practical and affordable financing option for policyholders who want to meet short-term financial needs without disrupting their life insurance coverage. With competitive interest rates such as the LIC policy loan interest rate, minimal eligibility barriers, and quick disbursement, this facility offers a balance between liquidity and long-term planning. However, like all financial products, it should be used judiciously. Understanding the terms, keeping up with repayments, and assessing your actual borrowing requirement will help you make the most of this secured borrowing option without compromising your family’s future protection.