
Introduction to Loan Against Insurance Policy
Loans against insurance policies can only be availed in case one pledges specific traditional policies like money back and endowment policies. Besides having a savings component, these policies also have a life cover component which makes it acceptable to banks. In order to avail a loan on an insurance policy, the policy must acquire a surrender value. The amount sanctioned for the loans is usually 85% to 90% of the policies surrender value.
How to Get Loan on your Insurance Policy
Insurance policies are now being considered as valuable collaterals for banks after LIC of India confirmed that banks are the biggest lenders of personal loans. LIC apart, several other life insurers such as Edelweiss Tokio Life and many other banks including HDFC Bank and the State Bank of India grant loans to customers against insurance policies.
Loans against insurance policies are sanctioned only when traditional policies such as money back and endowment policies are pledged. These policies have life cover in addition to savings elements that make them acceptable to banks. Unit-linked insurance plans and term insurance covers are usually not accepted as collateral.
The surrender value must be acquired by the policies if the applicant is to gain eligibility or the loan. The policy must be assigned in favour of the insurer, and usually, the amount of money granted by insurance companies is 85% to 90% of the surrender value. The rate of interest charged by LIC is 10% and it has to be paid on a half-yearly basis.
The repayment tenures are very flexible and LIC also provides customers with a choice of making only interest payments, with a provision for the deduction of the loan amount from the claim amount when it is time to settle the loan. The repayment procedure and interest rates will differ based on the bank or lender from whom you wish to take out the loan. The interest rates, however, are comparatively lower than those charged by banks for secured loans. They are also considerably lower than rates associated with personal loans.

Which insurance policies are eligible for a loan?
You cannot avail of loans against every type of life insurance policy. Therefore, it is better to check with your insurance company before buying any plan. Policies such as whole life policy, money-back policy, and endowment plan provide a loan against a life insurance policy. However, such loans are not available against term insurance policies and unit-linked plans.
What are the benefits of a loan against Life insurance policy?
Some benefits of loan against insurance policy are:
Lower interest rates: One of the best benefits offered on these types of loans is the lower rate of interest when compared to other financing options.
Quick disbursement: Since the documentation required in this loan type is minimal, the disbursement of the loan is quicker with a limited application processing.
Instant approval: You can also get instant loan approval based on your policy’s surrender value. It means that you can avail of a maximum loan amount of up to 85%-90% of the surrender value of your policy.
Fewer chances of rejection: Unlike unsecured loans, there’s less chance that your loan application will get rejected as you hold an insurance policy as a collateral/security with the company.
Rate of interest
The interest rate charged on this type of loan is comparatively lower when compared to other unsecured financing options. In such loans, the interest rate depends upon the prevailing rates which were applicable at the time of taking the policy. Usually, the interest rates are charged around 10% p.a., for loans taken against insurance policies. So, you need to check this before opting for a loan against your policy.
Repayment
When you take a loan against an insurance policy, the loan term is the same as your policy term. The policyholder will have to pay all due payments before the end of the policy term. Repayment terms may vary between different lenders. Most of the lenders also allow their customers to prepay the loan, without any extra charges. Make sure you also need to pay all your due premiums on time to save your policy from getting lapsed.
The surrender value of the policy
It is the amount that is paid by the insurer to the policyholder if he/she decides to close their insurance policy before maturity or due to the happening of an uncertain event. So, while applying for a loan against your insurance plan, you need to be aware of the amount in which you will be paid if you cancel your policy before its maturity.
Loan amount
The loan amount for which you will be eligible for depends on the surrender value of your policy. However, banks and insurers will not offer you a loan on the entire surrender value and will instead offer you the percentage of the policy’s Surrender Value. The loan amount that you are entitled to borrow will vary between insurance providers and banks. However, you can usually borrow up to a maximum of 85%-90% of the surrender value of your policy.
How to apply for a loan against a life insurance policy?
The process for applying for a loan against an insurance policy may differ from one insurance company to another. But you can always contact your insurer’s customer care and inquire about the entire application process, surrender value of the policy, the eligible loan amount, and the terms and conditions related to this.
What are the documents required?
To avail this loan, a policyholder will have to submit:
- A loan application form
- The original insurance policy document along with your address proof, ID proof, and income proof
- ‘Deed of Assignment’ which will assign your insurance policy in favor of your lender
- A copy of a cancelled cheque
- Payment receipt for the loan amount