Life often throws unexpected financial needs your way medical bills, education expenses, or urgent business requirements. While savings may not always be enough, your life insurance policy could be a valuable solution. Instead of surrendering it and losing long-term benefits, you can borrow against it. This is known as a policy loan.
Access quick liquidity with a loan against an insurance policy and meet urgent expenses without disturbing your savings. Apply now
This guide will help you understand what a policy loan is, how it works, eligibility conditions, repayment rules, risks, and why it can be a smart financing option.
Loan against insurance policy is called - Policy loan explained
A loan against insurance policy is called a policy loan. It allows policyholders to use their life insurance policy as collateral to get funds from the insurer or a financial institution. The loan is typically given against the surrender value of the policy, not the total sum assured. This way, you do not have to liquidate your policy or compromise on its long-term benefits while getting access to urgent funds.
What is a policy loan (loan against insurance policy is called)
In simple terms, a policy loan is a secured loan provided against the cash value or surrender value of a life insurance policy.
Here is how it works:
- Collateral: The insurance policy itself acts as security.
- Eligibility: Only certain policies, like ULIP (Unit Linked Insurance Plans), qualify.
- Loan amount: Based on surrender value (usually up to 80%).
- Ownership: The policyholder retains ownership and benefits of the policy.
- Quick process: Easier to get compared to unsecured loans like personal loans.
Enjoy quick approvals with a loan against insurance policy and cover urgent needs with ease.
Which insurance policies qualify for policy loans?
Not all life insurance policies are eligible for loans. Only those with a cash or surrender value qualify.
Policies eligible for loans include:
- Unit Linked Insurance Plans (ULIPs) – market-linked plans that accumulate cash value.
Policies not eligible:
- Term insurance plans.
- Pure risk cover policies without maturity benefits.
Leverage your ULIP or endowment plan with a loan against insurance policy to unlock emergency funds. Apply now
How much can you borrow? Surrender value and loan limits
The loan amount depends on your policy’s surrender value, which is the cash value accumulated if the policy is discontinued.
For example:
- Policy surrender value: Rs. 5,00,000
- Loan-to-value ratio: 80%
- Eligible loan amount: Rs. 4,00,000
| Policy surrender value | Loan-to-value ratio | Maximum loan amount |
|---|---|---|
| Rs. 2,00,000 | 80% | Rs. 1,60,000 |
| Rs. 5,00,000 | 80% | Rs. 4,00,000 |
| Rs. 10,00,000 | 80% | Rs. 8,00,000 |
Interest rates and repayment: Understanding costs
Interest rates on policy loans are usually lower than unsecured loans, since the policy acts as collateral. The repayment can be flexible, but interest must be paid regularly to prevent policy lapse.
Example: If you borrow Rs. 3,00,000 at 10% p.a. interest, the yearly interest would be Rs. 30,000. Failure to pay interest can lead to the outstanding loan amount being deducted from the policy benefits.
Impact on death benefit and policy value
A policy loan reduces the death benefit payout. If the insured passes away before repaying the loan, the outstanding loan plus accrued interest is deducted from the death claim.
Example:
- Policy sum assured: Rs. 20,00,000
- Outstanding loan: Rs. 3,00,000
- Interest accrued: Rs. 50,000
- Nominee receives: Rs. 16,50,000
Thus, while a policy loan provides liquidity, it also impacts the future payout if not repaid on time.
