Introduction to Loan Against Insurance Policy
A loan against insurance policy allows a policyholder to borrow money by pledging their life insurance policy as collateral. This facility is available from insurance companies directly (like LIC) and from some banks and NBFCs that accept insurance policies as security. First-time borrowers often find this route less intimidating than a traditional bank loan because it involves minimal documentation and no credit score evaluation.
How Is Loan Eligibility Against LIC Policy Determined?
Loan eligibility against lic policy is primarily determined by the surrender value of the policy. Surrender value is the amount an insurer would pay if the policyholder surrenders (cancels) the policy before maturity. The higher the surrender value, the larger the eligible loan amount.
LIC typically sanctions up to 90% of the surrender value for paid-up policies and around 85% for policies where premiums are still being paid. The surrender value itself depends on the type of policy, the sum assured, the number of years premiums have been paid, and the applicable bonus accruals.
Eligible Policy Types
Not all insurance policies are eligible. Whole life plans, endowment plans, and money-back plans accumulate surrender value and qualify. ULIPs may qualify under specific LIC products. Term insurance plans do not qualify because they have no savings component and hence no surrender value.
Before applying, policyholders should check with LIC or the relevant insurer to confirm whether their specific plan is eligible and what the current surrender value is.
Documents Required and Application Process
The documents required for a loan against insurance policy are minimal. For LIC loans: the original policy bond, a policy loan application form, and basic KYC documents. For loans from banks against insurance policies: the policy documents, assignment deed executed in favour of the bank, and standard loan application documents.
The application can be submitted at a LIC branch or through the LIC customer portal for digital policyholders. Processing typically takes three to seven working days.
Interest, Repayment, and Risks
Interest is charged half-yearly by LIC on outstanding loan amounts. First-time borrowers should be aware that unlike a bank EMI loan, there is no automatic deduction — the interest must be proactively tracked and paid. Unpaid interest is added to the loan principal, increasing the total liability.
If the loan and accumulated interest exceed a certain threshold relative to the policy value, the insurer may terminate the policy after due notice. This would result in both loss of insurance cover and partial or full loss of the policy’s savings value. Keeping loan utilisation conservative and ensuring timely interest payment prevents this outcome.
