A Guide to Loan Against LIC Policy

It's a way to borrow money when you need it, using your life insurance as security.
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Loan Against LIC Policy
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3 mins read
17-June-2024

Life Insurance Corporation (LIC) policies are not just about providing life coverage; they can also be a valuable financial resource. A loan against an LIC policy enables policyholders to access funds quickly by using their life insurance policy as collateral. This type of loan is ideal for those who need immediate liquidity without disrupting their long-term investment plans or life coverage benefits. By leveraging the surrender value of the policy, borrowers can secure a loan to meet various financial needs, such as emergency expenses, education costs, or business investments, while continuing to enjoy the benefits of their insurance policy.

Introduction to loan against LIC policy

A loan against a Life Insurance Corporation (LIC) policy is a secured loan where the policyholder can borrow funds using their life insurance policy as collateral. This type of loan offers a convenient way to access funds without having to liquidate other assets or investments. The amount that can be borrowed depends on the surrender value of the policy, which is the amount payable by the insurer if the policy is voluntarily terminated before its maturity date.

Loan against LIC policy explained

A loan against an LIC policy allows policyholders to use the policy as security for a loan. The loan amount is typically a percentage of the surrender value, often ranging from 70% to 90%. The policyholder continues to enjoy the benefits of the life insurance policy, including coverage, while the loan is outstanding. Interest is charged on the loan amount, and the policyholder can repay the loan in flexible installments.

Factors influencing loan against LIC policy

Several factors influence the loan amount and terms for a loan against an LIC policy:

  • Surrender value: The primary factor is the policy's surrender value, which determines the maximum loan amount.
  • Policy tenure: Longer tenure policies may have higher surrender values.
  • Loan-to-value ratio: The percentage of the surrender value that the lender is willing to offer as a loan.
  • Interest rates: The interest rate applied to the loan, which can vary between lenders.
  • Repayment terms: Flexibility in repayment terms can influence the decision to take a loan.

Advantages of loan against LIC policy

  1. Quick access to funds: Loans are processed quickly, providing financial relief.
  2. No impact on policy benefits: The policy continues to provide life cover and other benefits.
  3. Lower interest rates: Typically, interest rates are lower than those for unsecured loans.
  4. Flexible repayment options: Borrowers can choose from various repayment plans.

Risks associated with loan against LIC policy

  1. Interest accumulation: Unpaid interest can accumulate, increasing the overall debt.
  2. Limited loan amount: The loan amount is restricted to the policy’s surrender value.
  3. Impact on policy benefits: If the loan and interest are not repaid, it can reduce the death benefit payable.

Steps to avail loan against LIC policy

  1. Check eligibility: Ensure your policy is eligible for a loan.
  2. Calculate loan amount: Determine the surrender value and the loan amount you need.
  3. Submit application: Fill out the loan application form.
  4. Provide documents: Submit necessary documents such as the original policy document and ID proof as may be required by the lender.
  5. Approval and disbursement: Sanctioning and disbursement of the loan shall be subject to submission and verification of all the requisite documents and assignment of insurance policy in favour of the lender to secure the loan.

Comparison with other loan options

Loan against LIC policy vs. Personal loan

Feature Loan against LIC Policy Personal loan
Collateral required Yes, LIC Policy No
Interest rates Lower Higher
Loan amount Percentage of surrender value Based on income/credit
Credit score impact No Yes
Repayment flexibility High Moderate

 

Loan against LIC policy vs. Loan against securities

Feature Loan against LIC policy Loan against securities
Collateral required Yes, LIC Policy Yes, shares/securities
Interest rates Lower Variable
Loan amount Percentage of surrender value Up to 50% of security value
Market risk None Yes, depends on market
Credit score impact No No

 

Conclusion

A loan against an LIC policy is a viable option for policyholders needing quick access to funds without affecting their life insurance benefits. It offers lower interest rates and flexible repayment options compared to unsecured loans. However, borrowers should be aware of the risks, such as policy lapse and interest accumulation, and ensure timely repayment to avoid any adverse impact on their policy benefits. Comparing this option with other loan types can help in making an informed financial decision.

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Frequently asked questions

Can I get a loan against my LIC policy?
Yes, you can get a loan against your LIC policy. The loan amount is typically a percentage of the policy's surrender value, allowing you to access funds without liquidating your policy.
Is taking a loan from LIC good?
Taking a loan from LIC can be beneficial due to lower interest rates compared to unsecured loans. Additionally, the loan process is straightforward, and you continue to receive life cover benefits while the loan is active.
Can I take a loan from a paid up LIC policy?
Yes, you can take a loan from a paid-up LIC policy. A paid-up policy with sufficient surrender value can be used as collateral for the loan, providing you with access to funds based on that value.
Can we take a loan against a life insurance policy?
Yes, you can take a loan against a life insurance policy. This option allows you to use the policy's surrender value as collateral, enabling you to access funds while keeping the policy active and retaining its benefits.
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