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How to Avail Loan Against Life Insurance Policy 

13 January 2022

Individuals looking to borrow money for short-term needs, generally go for a personal loan or credit card. But the interest in these is relatively high. You could ask your friends or families for financial support. 

Alternatively, without having to depend on anyone, your life insurance policy could lend a hand here. Literally!

If you have taken a life insurance policy (other than term insurance), normally, you as a policyholder are eligible for a loan. What it essentially means is that you will pledge your life policy with the insurer and avail the loan. 

So, here is what you should know. 

Loan against life insurance policy 

Policyholders can avail loans against their life insurance policies provided such policies come with maturity values. The documentation too is minimal. You must present the original policy document or bond, along with your PAN, and identification proof. Post the verification, insurers usually provide the loan amount within a day. 

Loan amount 

Loans are offered by both banks and the insurer. But if you are available to loan against insurance policy, then it is better to go directly to the respective insurer. 

Now, the loan amount is usually determined by the surrender value of the policy. Surrender value is the value that any policy (where the maturity amount is paid after the policy term) acquires if the premiums are paid continuously. This continuous period could vary with insurers. But usually, you as a policyholder will be eligible for a loan if you have paid the premium for a continuous period of three years. 

The timely payment of premium and the surrender value are two important factors considered while determining the loan amount. 

As for loan amount, nearly 80-85% of the surrender value of the policy amount is offered by most insurers. Further, if you have stopped the premium payment (if the policy has lapsed) and it has acquired surrender value, you can still avail loan against the same. 

In LIC’s Bima Jyoti plan, for instance, the loan amount offered is up to 90% of surrender value and for those paid-up policies (where the premium payment had stopped), the loan amount is up to 80% of surrender value. In the case of Bima Jyoti policyholders can avail loan if the premium is paid for two full years. 

Interest

The interest rates for loans against insurance policies are relatively lower when compared to credit card and personal loans. 

Taking the above LIC policies example, if you had availed a loan against Bima Jyoti plan, then interest to be paid on a (compounding) half-yearly basis. Insurers usually fix the applicable rate of interest at the time of availing the loan. This interest rate is usually RBI’s rate or 10-year G-Sec rate. 

So, for instance, if you have taken a loan against the policy from LIC, then for a loan sanctioned between 1st May 2020 and 30th April 2021 the applicable interest rate shall be 9.5% per annum. 

Repayment 

The frequency of repayment of principal and interest depends on the insurers. Some insurers prefer to make repayment based on the frequency of premium payment. 

So, for instance, if you pay a premium every quarter, then your loan repayment too should be every quarter. Some insurers have the repayment every six months. 

In case of default

Loan amount gets accumulated in the event of default of repayment of loan on the due date. Some insurers charge a penalty for missing the due. More importantly, the insurers close your policy, if the loan amount outstanding (including interest) exceeds the surrender value. 

Similarly, in case of the death of a policyholder then the insurer will deduct the loan amount before paying the balance policy amount to the nominee. 

Points to note

There are a few points to note when you avail a loan against: 

  1. Those policyholders who are availing loan against life insurance policy should continue paying the premium even after availing loan
  2. One can avail loan against traditional life insurance policies. This includes endowment, money back and other savings-oriented plans. The policy document clearly states whether that policy is eligible for loan. 
  3. The policy will not pay any maturity if the loan amount exceeds the policy amount or surrender value. 
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