If you have dependents, you need a life insurance policy.
The mental peace that comes from knowing that your family’s financial future is secure is worth the premium you pay.
There’s another added benefit.
If you’re ever in need of money, you don’t need to take high-interest personal loans. You can take a low-interest loan against your LIC policy!
Let me explain.
How Does Personal Loan Against LIC Policy Work?
Generally, a loan is given against collateral – something the bank can possess and sell if you don’t repay the loan.
When you take a loan against the LIC policy, the policy functions like collateral.
You can take this loan either from LIC directly or from other lenders.
| Loan Attribute | Value |
| Max Policy Tenure | Policy Maturity Date |
| Min Policy Tenure | Six Months |
| Maximum Loan Amount | Up to 90% of Surrender Value |
| Interest Rate | Typically 9-12% |
| Applicable Policies | Endowment and Money-Back Policies |
Understanding the Surrender Value
Surrender value is what the policyholder will get when you terminate the insurance policy before the maturity date.
Note: Surrender value is applicable only for policies that have a savings component. That means term-life policies are automatically ruled out. Even ULIPS are not eligible for loans.
The surrender value is meager in the initial years. As you pay more premiums, the surrender value keeps increasing.
There are two types of surrender values:
- Guaranteed surrender value = Surrender value factor x Total premiums paid
- Special surrender value = [(Basic sum assured x Number of premiums paid/ number of premiums payable) + accrued bonuses] x applicable surrender value factor
If your policy has both, the highest of the two values is considered as surrender value.
Say you have an insurance cover of say Rs 50 lakhs. After a few years of premium payment, the surrender value is Rs 10 lakhs. You will be eligible for a loan of around Rs 8-9 lakhs (80-90% of the maximum surrender value).
The Primary Benefits of LIC Policy Loan
It is straightforward to avail a personal loan against a LIC policy.
Here are some of the benefits.
#1. Quick Cash
Typically, a loan against LIC policy gets disbursed within max 3-5 days of the application.
If you apply through LIC, they usually transfer the loan amount within 2 days.
Some people claim to have received the money within 3 hours. That’s a lot faster than most personal loans.
#2. Low-Interest Rate
The interest rate against LIC policy is comparatively lower as compared to personal loans. Usually, the interest rate is between 10 and 12 percent.
Moreover, you need to pay the interest only once every 6 months.
#3. Minimal Documentation
Since the loan is given against the policy, it gets cleared quickly.
The following is all you need to apply for the loan:
- Fill up the application form
- Provide the original policy document (submit to the nearest LIC office)
- Submit proof of residence, identity proof, and income proof
- NEFT details for loan disbursement
#4. Flexible Repayment – No EMIs
The best part of a loan against LIC policy is that you can repay the loan at your convenience.
There are no monthly EMIs or fixed deadlines for repaying the loan. The only criterion is that you have to pay the accrued interest once every 6 months.
You can choose the following repayment options:
- Pay interest + principal like a regular loan
- Continue paying the interest portion of the loan only. Repay the principal when you have excess money
- Pay only the interest portion of the loan. The principal amount can be settled against the claim amount on maturity/claim settlement
There are no pre-payment or foreclosure charges.
Once you repay the sum, you get your policy documents back.
#5. Credit Score is Irrelevant
Got a bad credit score? No problem.
You do not have to worry about your CIBIL score when you apply for this loan.
Even if you have a low score, LIC does not have any risk since they have collateral against your loan.
Guide Alert: To improve your CIBIL score, follow these tips.
LIC Policy Loan Eligibility: Can You Get The Loan?
Apart from being at least 18 years old and an Indian, you should meet the following conditions.
#1. Hold Endownment or Money-Back Policies
LIC gives the loans only to the endowment and money-back policyholders. Term plan insurance policyholders are not eligible for this loan.
Some of the policies against which the loan can be taken are New Jeevan Anand, Jeevan Rakshak, Jeevan Lakshya, Single-Premium Endowment Plan, New Endowment Plan, Limited Premium Endowment Plan, Jeevan Pragati, Jeevan Labh, etc.
#2. 3 Years of Continuous Premium Payments
To avail the loan, you should have paid the premiums in full for at least 3 years.
Note: If you have defaulted, you do not qualify for loan from LIC.
Loan Default Scenarios
#1: You Failed to Make Interest Payment
If you fail to pay the interest for 30 days after the due date, LIC can foreclose the policy.
The proceeds of the policy will go to the lender to settle the loan amount. You will get the remaining surrender value after the outstanding loan is deducted from it.
#2: Policy Matures Before Loan Repayment
If the policy matures before the loan is repaid, LIC can deduct the loan amount from the maturity amount. You get the remaining amount.
#3: Outstanding debt >= Surrender Value
If the amount of outstanding debt becomes more than the surrender value of the policy, LIC can terminate the policy.
The coverage benefit will stop, and you will not get any money back.
How to Apply for Loan Against LIC Policy?
Offline Loan Process
Submit Form 5196 to the nearest LIC branch to take out a new loan.
For a follow-up loan (second loan), you’ll need to submit Form 5205.
Online Loan Process
Before applying for a loan online, register yourself as a Premier User on the LIC website.
To register as Premier User, you’ll need to download an auto-generated form, take a print-out, sign the form and upload it on the LIC site. Here’s a detailed guide.
You can request a loan by clicking on “Online Loan” that is shown under the “Online Services Portal.”
Note: Even if the application is online, you still need to submit the original policy bond to your nearest LIC branch. If you lost the original policy bond, apply for a new one before requesting a loan.
Personal Loan or Loan Against Insurance Policy?
If you need cash urgently for medical, marriage, educational, or other expenses, a loan against a LIC policy is a great option.
When you take a loan against a life insurance policy, the policy gets assigned to the lender. The lender has the right to deduct the loan and interest outstanding from the claim settlement in case you die before paying the remaining amount to the beneficiaries.
However, in the case of personal loans, if the loan applicant passes away, the liability does not transfer to anyone else.
Recommendation: Overall, a loan from LIC makes better sense due to the low-interest. If the loan amount is not enough, take the remaining amount as a personal loan.
FAQ
How do I know the status of the loan application?
Log in to your LIC portal. The status will be updated once the loan is approved. If the loan is approved, it can take up to 2 days for the NEFT transfer to complete.
How quickly can I get the money?
After the application and submission of necessary documents, you can get the money as quickly as 3-4 hours. Sometimes it can take up to a week. Typically, you should get the money within 2 days.
Should I pay full interest or part-interest?
Always pay full interest possible. If you part part-interest, your net interest will be higher.
Can I submit a copy of the policy bond or upload a PDF document online?
No. You have to submit the physical bond.
With a digital copy, frauds are more likely. People can take loans from multiple institutions for the same policy.
What happens after I repay the entire loan?
The policy bond will be mailed to your registered address.
Do I need to pay the policy premium if I take a loan on the LIC policy?
Yes. You need to continue making premium payments. Else, the policy will lapse, and the loan provider can surrender the policy on your behalf to recoup the money.
What is the interest rate for loan against LIC policy?
9% to 12% is the typical interest rates depending upon the lender.
Should I take the loan from LIC or a different lender?
Taking a loan from LIC is easier. However, if you have a different lender offering a competitive interest rate, consider them.
What are the alternatives to taking a loan against a LIC policy?
You can consider personal loans or using credit cards. If your city has a trusted chit fund like KSFE, you can consider chit funds as well.
What happens if the beneficiary dies?
In case of death, the life insurance amount will be settled after payment of the outstanding loan principal and interest.
What happens if the policy lapses after taking the loan?
If the policy lapses, the lender can surrender the policy and recover the outstanding amount.
I have a non-LIC life insurance policy. Am I eligible for a loan?
Probably. If you have a money-back or endowment policy from any of the reputed insurance companies in India, you might be eligible for loans. Check with your insurance company and bank to see if the life insurance policy can be used as collateral for loans.
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