If money is needed in emergencies, people resort to conventional methods of borrowings such as personal loans or loans against gold. But if you possess a life insurance policy with good surrender value, you are eligible to take the amount as loan against insurance policies. It is another less popular but useful option through which you are allowed to draw money without impacting your life coverage. In this article, we will be discussing what is loan against insurance policies, how the process works and what are the most critical things to be known before availing the facility.
What is a loan against insurance policies?
Loan against insurance policies means receiving funds through pawn of your life insurance policy. It is most commonly managed in lieu of the original life insurance policies like endowment or whole life that build cash value. A cash value in such a situation, or even the surrender value, is the foundation from which the size of the loan is calculated. Insurers or lending organizations consider the surrender value of the policy and extend a loan—usually a proportion of such value. The policy remains valid subject to the payment of interest, and the assured amount remains intact except in the case of default from the borrower’s side.
Factors to be noted before availing loan against insurance
1. Nature of policies eligible
Not every life insurance policy is available to borrow against. Term insurance policies with no cash value generally are not. This provision is only available on mature policies like:
- Endowment policies
- Money-back plans
- Whole life insurance
- Unit-linked insurance policies with maturity value (if any)
Pre-check whether the policy is borrownable by lender or insurer before submitting an application.
2. Loan on surrender value
The amount of maximum loan is not arrived at based on the sum assured but on the surrender value of the policy. The surrender value accumulates over time as you keep paying premiums. Generally, the lenders advance 80–90 percent of the surrender value as a loan. Suppose your surrender value is Rs. 2,00,000 for your policy. You can borrow approximately Rs. 1,60,000 to Rs. 1,80,000. You should be aware of how much you can borrow while deciding your expenses.
3. Repayment terms and interest rate
The interest charged on the insurance policy loan is usually less than for unsecured loans since the policy is collateralized.
JADX. Interest rate in 2025 is approximately 9 to 12 percent yearly depending on the insurer and policy. When checking the loan against life insurance policy interest rate, you will notice it is lower than a standard personal loan, making it a more affordable option. Interest-only installment payment or regular EMIs can be made, and principal at maturity or policy lapse. Worthy information to understand is the repayment pattern to prevent default or policy lapse.
4. Effect on life cover
Least valued of all is the possible impact on your life insurance cover. Even though the policy remains active throughout the duration of the loan, failure to repay the loan or interest can cause deduction of the arrear from the policy proceeds. If the arrear is not paid, the insurer may offset the arrear against death cover paid to nominees. In case of no claim regarding the loan outstanding, the insurer will set-off the loan and the interest against the claim. The borrowers should thus maintain repayment records so that their dependents may enjoy the intended financial security.
5. The policy should have a minimum surrender value
Life insurance policies do not accrue surrender value overnight. They usually accrue surrender value after a couple of years of making regular premiums—two or three years by the insurer. You cannot avail a loan before that. So, if you are a new client to a traditional policy, you might have to wait until you are eligible to take a loan.
6. Loan processing and documentation
It is generally easy to get a loan against an insurance policy, particularly if using the direct loan offered by the insurer. The minimum of the documents required are:
- Original policy document
- ID and address proof documents (KYC)
- Completed loan application form
- Bank details for disbursement
Zero processing time, and the loans are usually cleared within two working days if the papers are in order. Even some insurance companies have started the service of filling forms on the web, so that is even more convenient.
7. Prepayment or foreclosure flexibility
Preforeclosure or prepayment of the loan is permitted by most insurers without annoying penalties. This is beneficial when you have a windfall or when you have some surplus funds and want to pay off the loan prematurely. Ensure you negotiate terms first, however, since there are lenders who will charge a little for pre-closure. Refinancing to an adjustable payment plan is necessary, provided your income is not steady or in case you want to cut down on interest charges.
Benefits of availing loan against insurance
- Lower rate of interest than personal loan
- Faster processing with very little paperwork
- No other sale of assets or encashment of fixed deposit needed
- Policy continues to provide life cover in the event of payment of instalments
- No effect on credit score if repayment is timely
Dangers and limitations to consider
Although there are certain benefits of the facility, the following risks must be remembered:
- Loan decreases effective cover duration in case of delayed payment
- Only against listed policies
- At the mercy of surrender value, which can fall short of major needs
- Default in paying can result in loss of policy or low maturity value
Conclusion
Loan against insurance policies is an easy means of fulfilling short-term financial needs without parting with your investment or derailing your long-term plan. If you are willing to know about the loan against insurance policies, it is a loan facility on the surrender value of life insurance policies. But you must have all the knowledge of your policy terms and conditions, payment period, and surrender value in advance. As long as you know the limitation and apply the loan wisely, it can be a useful source of finance in a period of need or lack of money on a short-run basis. Take advice from your financial advisor or insurer at all times on whether this borrowing option is best for your finance and repayment capability.
