Multiple banks. Different interest rates. Call it a "conflict of interest".
  • Loan Against LIC Policy

    A life insurance policy is meant to provide financial coverage to one’s dependents in case of an untimely eventuality. In addition to this benefit, certain types of life insurance policies also allow policyholders to take a loan against the surrender value of the policy. Keep in mind that you can only borrow a loan against your life insurance policy if your policy has acquired a surrender value.

    Types of Policies against which You Can Borrow a Loan

    Individuals who have purchased a term insurance policy from LIC will not be able to borrow a loan against the policy. Also, as per recent regulations, you also cannot borrow a personal loan against a unit-linked insurance plan (ULIPs).

    You can, however, borrow loans against traditional policies such as money-back plans, whole life insurance plans, and endowment plans. That said, keep in mind that you cannot apply for a loan as soon as you purchase an LIC life insurance policy. You will need to wait until the policy acquires a surrender value, which will happen only after you have paid the due premiums for around 3 years.

    How is Borrowing a Loan against and LIC Policy Better than Taking Other Loans?

    A few benefits of borrowing a loan against an LIC policy are as follows:

    • Lower Interest Rate: The interest rate that is charged for a loan taken against an LIC policy is lesser than the interest that is charged when you borrow other types of loans.
    • Flexible Repayment: Unlike in the case of other loans, wherein EMIs will have to be paid on a monthly basis, individuals who borrow loans against their LIC policies can choose to only pay the interest once or twice a year. The borrower can repay the principal at the end of the policy term or have the borrowed sum adjusted from their maturity or death benefit payout.
    • No Guarantor or Security Required: Unlike in the case of gold loans or mortgage loans, you need not have a guarantor or provide security to avail a loan against your policy.

    Eligibility Criteria

    The eligibility criteria to borrow a loan against one’s LIC life insurance policy are as follow:

    • The individual should own an LIC life insurance policy.
    • The policy should not be a term insurance policy or unit-linked insurance plan (ULIP).
    • The policy should have acquired a surrender value.
    • The individual should be a citizen of India.

    *Note: Any other conditions that are specified by the lender will have to be met for you to be able to borrow a loan against your LIC policy.

    Features and Benefits

    Some of the key features of borrowing a loan against your LIC life insurance policy are as follows:

    • This facility of taking a loan against a life insurance policy is provided to individuals, partnerships, Hindu Undivided Families (HUFs), companies, and sole proprietorships.
    • You can borrow a loan against the surrender value of your policy, and not the sum assured of your policy. In most cases, you will only be able to borrow up to 70% to 90% of the policy’s surrender value.
    • You can apply for a loan against your LIC policy through online channels.
    • To successfully borrow a loan against your life insurance policy, you will need to submit a deed of assignment, which will assign the rights of your policy in favour of the lender.
    • You can borrow high value loans with your LIC life insurance policy since the amount that you can borrow is subject to your policy’s surrender value.
    • You can track your loan details through online and offline channels.
    • Most lenders will only charge interest on the sum that you borrow. Interest will not be charged on the entire loan amount.

    How to Get a Loan against an LIC Policy?

    If you are eligible to take a loan against your LIC policy, you will need to do as follows to borrow a loan:

    • Visit the nearest branch of a bank.
    • Fill-up the loan application form and submit to the lender’s representatives with the required documents.
    • Existing customers of the bank will need to submit minimal documents.
    • The lender will verify the documents submitted by you, after which your application will be approved.
    • If approved, the loan amount will be disbursed into your savings bank account.

    LIC Policy Loan Interest Rate

    Most lenders charge an interest rate of between 9% and 11% p.a. on loans taken against LIC life insurance policies.

    Documents Required to Borrow a Loan against an LIC Policy

    A few documents that you will need to submit when borrowing a loan against your LIC life insurance policy are as follows:

    • Original policy document
    • Proof of identity
    • Proof of residence
    • Proof of income
    • Deed of assignment

    Alternatives of Personal Finance besides Loan against LIC Policy

    There are other options for availing personal finance, other than loan against your LIC policy:

    1. Independent personal loans from banks and financial institutions, with higher rate of interest but more features, lesser restrictions of loan amount and more benefits.
    2. Personal Loan against Credit Card, which are more viable as an option in terms of lower interest rates and the repayment can be made through the monthly credit card bill cycle through EMIs. Again lesser restrictions.
    3. Other Life insurance providers also offer loan against their life insurance products although it is suggested not to take a loan against a ULIP as it has some risk factors involved.

    LIC Loan Repayment

    You will need to pay interest on the loan amount that you utilise at least twice in a given year. The principal can be repaid at the completion of the loan tenure or can be adjusted from payouts that you or your nominee may be eligible to receive via the policy.

    If you have an LIC policy, borrowing a loan against your policy may be a better option borrowing other types of loans. That said, ensure that you familiarise yourself with the various terms and conditions of the loan before you submit the application form for the same.

    Loans against LIC Policy FAQs

    1. What if the policy matures or is claimed within the loan repayment period?

    Ans: In case the policy matures or is claimed within the repayment period, interest will be charged only till the maturity or claim date, appropriate principal and interest will be deducted and the balance will be paid out to the policyholder or the nominee, as the case may be.

    2. Will I be eligible to borrow a loan against my LIC life insurance policy even if I default on premium payments?

    Ans: No, you will need to pay your premiums regularly for three full years for the policy to acquire a surrender value. You will only be eligible to borrow a loan against your policy after it acquires a surrender value.

    3. What will happen if my policy lapses after I take a loan against the policy?

    Ans: In this case, the lender will recover the outstanding loan amount from your policy’s surrender value.

    4. What is the minimum loan amount that I can borrow against an LIC policy?

    Ans: The minimum loan amount that you will be able to borrow will vary based on the lender’s terms and conditions. Most lenders, however, allow policyholders to borrow any sum upwards of Rs.50,000.

    5. How do I know if I am eligible to avail a loan against my insurance policy?

    Ans: You can contact your insurance provider or a lender to know whether you are eligible to borrow a loan against the policy.

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