How to Get a Loan Against Life Insurance Policy? 

Can I Take a Loan Against My Life Insurance Policy?

Yes, you can. Many life insurance policies in India have a built-in savings component that allows you to borrow money against the policy. This option can be a smart way to access emergency funds without disrupting your long-term financial goals or giving up your insurance coverage altogether. Let’s understand how this works, who can apply, and what you need to know before taking a loan against your life insurance policy.

What is a Loan Against Life Insurance Policy? 

A loan against life insurance is a secured loan, meaning you pledge your life insurance policy as collateral to get funds. The loan is backed by your policy's surrender value or cash value, not the total sum assured.

The surrender value is the amount you would receive if you discontinued the policy before maturity. Lenders, including insurance companies, banks, and NBFCs allow you to borrow a certain percentage of this value, usually between 80% and 90%.

This type of loan is ideal for policyholders who need funds quickly but want to avoid liquidating investments or taking high-interest personal loans.

Let’s understand “What is a Loan Against Life Insurance Policy?” in simple words: 

It’s a secured loan where you can borrow money by pledging your life insurance policy as collateral.

How Does It Work?

The insurer or bank provides a loan amount based on the surrender value of your life insurance policy.

Who Can Avail This Loan?

Any policyholder with a traditional life insurance plan that has accumulated a surrender value can apply.

What Are the Benefits?

You get quick access to funds at lower interest rates without the need to liquidate your policy.

Why Choose a Loan Against Life Insurance?

It helps you meet urgent financial needs while keeping your life cover active and your long-term goals intact.

Are All Life Insurance Policies eligible for availing loans? 

No, term insurance plan are not eligible for availing loans, as per IRDAI. Generally, only plans that accumulate a cash value or surrender value over time can be used as collateral for a loan. However, you can avail of a policy loan against a life insurance policy, such as endowment policies, whole life insurance plans and money-back policies.

How Does a Life Insurance Policy Loan Work?  

When you apply for a loan, the insurer or lender assesses the policy's surrender value to determine the eligible loan amount. Once approved, you receive the funds, and the policy temporarily becomes assigned to the lender as collateral.

Here's what you should know about how it functions:

• Loan amount: Generally, you can borrow 80–90% of the policy's surrender value.

• Ownership: The lender holds the policy rights while the loan is active. Once you repay the loan in full, those rights are reassigned to you.

• Repayment: You can repay through EMIs or by paying only the interest periodically. If you choose the latter, the unpaid principal will be deducted later from your maturity or death benefit.

• Coverage Continuity: Your policy coverage remains active as long as you continue to pay your regular premiums and adhere to the loan repayment terms.

How Much Amount Can I Loan With Life Insurance?  

Instead of the policy’s total sum assured, the surrender amount is considered for availing such loans. The surrender amount is available only in cases where a premium is paid for plans for at least 3 years. Most banks provide 80% to 90% of the surrender value as a loan from the insurer.

What are the Benefits of Taking a Loan Against Life Insurance Policy?

Taking a loan against your life insurance policy can provide you with the following benefits:

• Banks do not check CIBIL scores when sanctioning loans against insurance. Therefore, this option is very useful for people with low CIBIL scores as you can get a loan without hassles.

• Loan against insurance is one of the best alternatives to personal loans. On average, interest rates on a personal loan vary between 12% and 24%, whereas the interest rate on a loan against life insurance is much lower.

• The documentation is minimal, and there are fewer chances of rejection. As a result, the loan gets sanctioned rather quickly.

What is the Maximum Loan Amount and Interest Rate?

The maximum loan amount depends on the type of life insurance policy and its surrender amount. The loan amount is generally a percentage of the policy’s surrender value. The loan amount can go as far as 80 -90% of the surrender value in the case of endowment or money-back plans. Various insurers consider around 50% of the total premium paid to compute the maximum loan amount. 

The interest rate for a loan against insurance depends on the amount and installments of premiums paid. The higher the premium amount and installments, the lesser will be the interest rate. Usually, banks link the interest rate with their base rate. Life Insurance Corporation of India charges 9%, to be paid half-yearly, whereas Bank of India charges 13.15%.

What is the Eligibility Criteria to Avail Loan Against Life Insurance? 

The main eligibility criteria are to ensure that the type of life insurance plan you buy should be approved by your chosen lender for a loan. This facility loan is available to companies, partnerships, sole proprietorships and Hindu Undivided Families (HUF). 

How is your loan eligibility decided?

In the case of ULIPs, a loan against the life insurance plan is usually offered up to 70%–75% of the paid-up value. In traditional policies, it can go up to 85%–90%.

What Happens if You Fail to Repay Your Loan Against Life Insurance?

The insurer will give you a repayment schedule, though you can pre-pay or foreclose the loan without any charges. Repayment clauses vary from one insurer to another. If the insured fails to repay the loan, the policy will lapse. 

Any default in loan repayment can have a huge impact on the policy benefits. If the insured dies without repaying the loan, the insurer will provide death benefits to the beneficiaries after deducting the due amount and interest rate. If you fail to repay, the loan amount will increase due to the compounding effect, and the unpaid amount will be added to the outstanding principal amount. The policy is terminated when the outstanding premium and interest amount equals the surrender value. In this case, the policyholder will lose the insurance coverage.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

What is the Drawback of Taking a Loan Against the Life Insurance?

The biggest drawback in taking a loan against your life insurance policy is that if the policyholder dies during the term of the policy, the nominee will not get the full policy benefits. The lender will deduct the outstanding loan and interest before paying to beneficiaries.

How Can I Apply for a Loan Against Life Insurance?

The first step is to ask the insurance company or the bank about the eligible loan amount. The next is applying for the loan and assigning the policy to the insurance company/bank. It means all rights on the policy will be transferred to the lender. Then, mention the policy details and the loan amount in the lender's format. Banks charge processing fees and other charges in addition to the interest rate. The loan may be sanctioned in 2–3 days; however, it may vary from one company to another. Once the loan is sanctioned, all rights on the policy are automatically transferred to the lender after the loan disbursement. Upon loan repayment, the lender will reassign the policy to an insurer by an endorsement.

What Documents are Required to Avail Loan Against Life Insurance?

You need to submit the following documents to avail of a loan against life insurance:

• Original Insurance Policy

• Deed of Assignment

• Cancelled Cheque

Wrapping It Up! 

While the protection cover provided by a life insurance policy is its important benefit, the facility of loan is valuable additional benefit. Always go through the terms and conditions of the bank before applying for a loan against life insurance policy to avoid discrepancies in long time.

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