A loan against policy life insurance is a secured credit facility where the policyholder assigns or pledges their life insurance policy to a lender — either the insurer itself or a bank — in exchange for a loan. The policyholder receives funds while the life cover remains in force, provided loan repayment obligations are met.
This facility is available only on policies that have accumulated a surrender value — the notional amount the insurer would pay if the policy were surrendered. Term plans, being pure risk cover with no savings element, do not have surrender value and hence do not qualify.
How Much Loan Can I Get on LIC Policy?
How much loan can i get on lic policy is one of the most common questions among policyholders. The answer depends on the policy's current surrender value, which in turn depends on the type of policy, sum assured, premiums paid, and duration of the policy.
As a general guideline, LIC sanctions loans up to 90% of the surrender value for paid-up policies (where premiums are no longer being paid) and up to 85% of the surrender value for policies where premium payments are active. The surrender value increases as more years of premiums are paid — a policy in its 10th year will have a much higher surrender value than one in its 5th year.
Key Terms Every Borrower Should Understand
The loan repayment for a loan against policy life insurance is not structured as a traditional EMI in most cases. Instead, the policyholder is expected to pay interest — half-yearly, typically — and repay the principal before or at policy maturity. If interest is not paid, it accumulates and is added to the outstanding principal, compounding the liability.
The assignment: when a bank lends against the policy, the policyholder may need to assign the policy to the bank (absolute or conditional assignment). In absolute assignment, the bank becomes the legal owner of the policy until the loan is repaid. This means any death benefit or maturity proceeds would first go to the bank to settle the outstanding loan.
Risks to Be Aware Of
If the outstanding loan and accumulated interest exceed the policy's surrender value, the insurer has the right to foreclose the policy after due notice. This would result in loss of life cover and the savings accumulated in the policy. Borrowers should ensure that the outstanding loan stays well below the surrender value at all times.
For policies assigned to banks, there is an additional risk — upon policy maturity or death claim, the bank recovers the outstanding loan first. The policyholder or nominee receives only the balance. Understanding these terms fully before signing is essential.
Summary of What to Check
Before availing a loan against policy life insurance, verify the current surrender value, calculate the eligible loan amount, understand whether the loan is offered by LIC directly or via a bank, clarify the interest payment frequency and structure, check whether assignment is required and what it entails, and confirm the impact on the nominee's claim.
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