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.
What is a 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.
Moreover, borrowing against your insurance policy ensures that you retain the benefits of your insurance while accessing the funds you need. Since the loan is secured, interest rates are relatively lower, making repayment more manageable. This option provides financial flexibility without the need to surrender your policy, allowing you to meet urgent expenses with ease.
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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.
Advantages of loan against LIC policy
- Quick access to funds: Loans are processed quickly, providing financial relief.
- No impact on policy benefits: The policy continues to provide life cover and other benefits.
- Lower interest rates: Typically, interest rates are lower than those for unsecured loans.
- Flexible repayment options: Borrowers can choose from various repayment plans.
Eligibility criteria for loan against LIC policy
To avail a loan against your LIC policy, you must meet certain criteria:
- Policy type: The loan is available on eligible traditional life insurance policies with a surrender value.
- Policy status: The policy must be active and have acquired a surrender value.
- Minimum holding period: Typically, the policy should be at least 3 years old.
- Loan amount: The loan amount depends on the surrender value, usually up to 90%.
- Premium payments: All due premiums must be paid up to date.
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.
Risks associated with loan against LIC policy
- Interest accumulation: Unpaid interest can accumulate, increasing the overall debt.
- Limited loan amount: The loan amount is restricted to the policy’s surrender value.
- Impact on policy benefits: If the loan and interest are not repaid, it can reduce the death benefit payable.
How to avail a loan against LIC policy?
You can apply for a loan against your LIC policy through two methods: online and offline. Below are the step-by-step processes for both.
Online process
- Visit the LIC portal – Log in to the official LIC website using your credentials.
- Navigate to loan services – Go to the ‘Policy Loan’ section under online services.
- Select the policy – Choose the eligible policy against which you want to avail the loan.
- Check loan eligibility – View the loan amount available based on the surrender value.
- Submit the application – Fill in the required details and submit the loan request.
- Receive loan amount – Upon approval, the loan amount is credited directly to your bank account.
Offline process
- Visit the LIC branch – Go to your nearest LIC office with the necessary documents.
- Fill out the loan form – Obtain and complete the loan application form.
- Provide policy documents – Submit your LIC policy details, identity proof, and other required documents.
- Verification and approval – LIC will review the application and assess the loan amount eligibility.
- Loan disbursement – Once approved, the loan amount will be credited to your registered bank account.
Both online and offline processes ensure a smooth and efficient way to access funds without surrendering your policy. With minimal documentation and quick approvals, a loan against insurance policy provides financial flexibility to meet urgent needs while keeping your coverage intact.
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What documents are required to avail loans against LIC policy?
To apply for a loan against insurance policy, you need to provide a few essential documents for verification. These ensure a smooth loan approval process.
- Duly filled loan application form – Required for processing the loan request.
- Original LIC policy document – Serves as collateral for the loan.
- Identity proof – Aadhaar Card, PAN Card, or Passport.
- Address proof – Utility bill, Aadhaar Card, or Voter ID.
- Cancelled cheque – For loan disbursement to the registered bank account.
- Premium payment receipts – Ensures that the policy is active and eligible for a 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 |
How to repay loans against LIC policy?
Repaying a loan against insurance policy is simple and flexible, allowing policyholders to manage their finances efficiently. You can repay the loan through the following methods:
- Regular EMI payments – Pay the loan amount in fixed installments.
- Full repayment – Clear the entire loan amount before policy maturity.
- Deduction from claim amount – If unpaid, the outstanding loan is deducted from the maturity or death benefit payout.
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.
