Loan Against Policy in Life Insurance

A loan against policy in life insurance is a facility that allows policyholders to borrow money by using their life insurance policy as collateral. It enables policyholders to obtain a loan against their life insurance policy without having to surrender or terminate it. It serves as a convenient way to obtain funds when needed.

A loan against policy in life insurance is a facility that allows policyholders...

Term Life Insurance that Welcomes Change

Life Cover Starting @ just ₹18/day*

Change Your Policy Term

As per your life stage and commitments

Hassle-Free Claim Settlement

99.38% Claim settlement ratio*

Smart Income Tax Savings

Save up to ₹54,600* on your taxes

ARN: L0088 | *T&Cs Apply

Key Takeaways

Collateral-based loan

Policyholders can borrow against their life insurance policy’s surrender value.

Eligible policies

Typically available for traditional savings-oriented policies (like endowment or whole life) that acquire a surrender value, not term insurance.

Loan amount

Usually ranges between 50% to 90% of the policy’s surrender value.

Interest rate

Fixed or variable, determined by the insurer.

Repayment flexibility

Policyholders can repay in EMIs or in a lump sum, but outstanding dues will be deducted from the claim/benefit if unpaid.

Continuous coverage

The policy remains active as long as premiums are paid, even if a loan is taken.

How Does a Loan Against Policy Work in Life Insurance?

When you take a loan against policy in life insurance, the insurer provides funds based on the surrender value of your policy. Here is how it works step by step:

Loan Eligibility

Loan eligibility applies only to life insurance policies that have a cash value, such as endowment or whole life plans. Term insurance policies are not eligible.

Application

The policyholder submits a loan request to the insurer, often with minimal documentation, as the policy itself serves as collateral.

Loan Amount

The insurer calculates the surrender value and sanctions a percentage of it as a loan (generally 50-90%).

Disbursement

Funds are credited to the policyholder’s account.

Repayment

The borrower pays interest and principal over time. If repayment is not made, the amount is adjusted from the policy’s maturity benefit or death benefit. The policy loan interest rate may vary by insurer and policy type.

Real-life Example

Rohit owns an endowment life insurance policy with a sum assured of ₹10 lakh. After 7 years, the policy builds a surrender value of ₹3 lakh.

The insurer offers him up to 85% of the surrender value, i.e., ₹2.55 lakh, as a loan.
Rohit borrows ₹2 lakhs at an 8% interest rate.
He continues to pay his regular premiums, and his policy remains active.
Later, he repays the loan in instalments. Had he not repaid, the outstanding balance would be deducted from the maturity benefit payable.

Loan Against Policy Vs Personal Loan

Aspect	Loan Against Policy	Personal Loan

Collateral	Life insurance policy	Unsecured
Interest Rate	Lower as compared to other loan types	Higher than the loan against policy
Loan Amount	Based on the surrender value	Based on credit score/income
Approval Speed	Faster, less documentation	Longer, requires a credit check
Impact on Policy	Policy stays active, and benefits are reduced if not repaid	No effect on insurance

Why Loan Against Policy Matters for Policyholders

Taking a loan against policy in life insurance provides easy access to funds for those in need of quick financial support. Let’s look at some of the key advantages of loan against policy:

Quick fund access: Provides quick access to funds without lengthy bank procedures.
Reduced cost of borrowing: The interest is normally lower compared to personal loans or credit card debts.
No dependency on credit score: Approval is based on policy value instead of credit history.
Ongoing protection: The life cover remains active, unlike when the policy is surrendered. So, when comparing loan vs surrendering policy, a loan helps you access funds without losing protection.
Reliable liquidity option: Useful during urgent financial requirements such as medical or education expenses.

Risk Note: In case of default in repayment of the loan, the insurer will offset policy benefits by deduction of dues (principal + interest). If the amount of outstanding debt exceeds the surrender value, the policy may lapse.

Summary

A loan against policy in life insurance is a viable method of borrowing money using your life insurance as security. It ensures that you do not need to forego your coverage while also obtaining the required funds at a lower interest rate.

Frequently Asked Questions

Can I take a loan against any life insurance policy?

No. Only traditional life insurance plans with a surrender value, such as whole life and endowment policies, are eligible for a loan against policy in life insurance. Term insurance does not qualify.

How much loan can I get against my policy?

Typically, insurers allow anywhere from 50% to 90% of the policy’s surrender value as a loan, depending on your policy’s loan eligibility.

What happens if I don’t repay the loan?

If unpaid, the outstanding loan (with interest) will be deducted from your policy’s maturity or death benefit. If dues exceed surrender value, the policy may lapse.

Do I need a good credit score to get this loan?

No. The loan approval is based on your policy’s surrender value, not your credit score or income level.

Is the interest rate fixed or variable?

It depends on the insurer. Some offer fixed rates, while others may revise rates periodically. The policy loan interest rate is generally lower than that of unsecured personal loans.

Can I continue paying premiums after taking a loan?

Yes. You must continue to pay your policy premiums to maintain coverage.

Can I repay the loan early?

Yes. Most insurers allow early repayment without penalties, making a loan against policy in life insurance a flexible borrowing option.

What documents are required for a loan against policy?

Usually, the original policy document, the loan request form, and basic ID proof are required.

Written by Neviya Laishram

1.7K Linkedin Followers

Reviewed by Vaibhav Kumar Kaushik

A senior editor with years of expertise, she fine-tunes content that connects, converts, and builds trust. She transforms heavy life insurance concepts into clear, aha-moment reads. Writing is her passion, and thinking ahead is second nature. When not wrangling words, she’s crushing game levels because every challenge is a puzzle waiting to be solved.