Loan against life insurance Policy

If you are in need of money and want to have a loan at a rate cheaper than personal loan, you can consider pledging your life insurance policy as collateral for raising the loan. You may apply for the loan either through the insurance policy or directly with the bank. However, it must be noted that as per IRDAI guidelines, the loan facility is available only against pledge of endowment, money-back and similar other life insurance policies and not against Unit Linked Insurance Plans (ULIPs) or term insurance plans.

To avail loan against your insurance policy, you need to have a policy which has been in force continuously for at least three years. The amount of loan will depend on the surrender value of the policy, so the more the number of premiums paid and more the number of years completed, the higher will be the surrender value. Usually, the loan will be 80-90 per cent of the surrender value. Hence, if you have a life insurance policy of Rs 30 lakh and the surrender value of your policy is, say, Rs 10 lakh, you would be eligible for a loan of Rs 8 lakh to Rs 9 lakh. However, the loan actual amount may vary from one company to another.

After availing the loan, the policyholder has to continue paying the premium of the policy for the remaining duration of the tenure. If the policyholder defaults in the payment of premium, the insurance company has the right to terminate the policy and recover the balance loan amount from the surrender value of the policy.

The policyholder has the option to repay the principal and interest amount together as EMIs or he may choose to pay only the interest on loan and repay the loan amount from the maturity amount of the policy.