How to take loan against life insurance policy

Life Insurance policy does not only provide you with life cover, but it also acts as a financial instrument to build a corpus. The benefits do not end just here; policyholders can also avail a loan against their life insurance policy to meet their immediate financial needs. Let us understand more about this concept in detail.

What is loan against an insurance policy?

Loan against an insurance policy is an arrangement where a borrower can avail loan by pledging their insurance policy as collateral with the insurance company. If the borrower is unable to pay back the loan on time, then the company reserves the right to hold on to the policy until the debt is realized in full.

Which insurance policies are eligible for a loan?

You cannot avail of loans against every type of life insurance policy. Therefore, it is better to check with your insurance company before buying any plan. Policies such as whole life policy, money-back policy, and endowment plan provide a loan against a life insurance policy. However, such loans are not available against term insurance policies and unit-linked plans.

What are the benefits of a loan against Life insurance policy?

Some benefits of loan against insurance policy are:

Lower interest rates: One of the best benefits offered on these types of loans is the lower rate of interest when compared to other financing options.

 Quick disbursement: Since the documentation required in this loan type is minimal, the disbursement of the loan is quicker with a limited application processing.

Instant approval: You can also get instant loan approval based on your policy’s surrender value. It means that you can avail of a maximum loan amount of up to 85%-90% of the surrender value of your policy. 

Fewer chances of rejection: Unlike unsecured loans, there’s less chance that your loan application will get rejected as you hold an insurance policy as a collateral/security with the company.

Things to know before you plan to opt for a loan against an insurance policy

 Rate of interest

The interest rate charged on this type of loan is comparatively lower when compared to other unsecured financing options. In such loans, the interest rate depends upon the prevailing rates which were applicable at the time of taking the policy. Usually, the interest rates are charged around 10% p.a., for loans taken against insurance policies. So, you need to check this before opting for a loan against your policy.


When you take a loan against an insurance policy, the loan term is the same as your policy term. The policyholder will have to pay all due payments before the end of the policy term. Repayment terms may vary between different lenders. Most of the lenders also allow their customers to prepay the loan, without any extra charges. Make sure you also need to pay all your due premiums on time to save your policy from getting lapsed.

The surrender value of the policy

It is the amount that is paid by the insurer to the policyholder if he/she decides to close their insurance policy before maturity or due to the happening of an uncertain event. So, while applying for a loan against your insurance plan, you need to be aware of the amount in which you will be paid if you cancel your policy before its maturity.

Loan amount

The loan amount for which you will be eligible for depends on the surrender value of your policy. However, banks and insurers will not offer you a loan on the entire surrender value and will instead offer you the percentage of the policy’s Surrender Value. The loan amount that you are entitled to borrow will vary between insurance providers and banks. However, you can usually borrow up to a maximum of 85%-90% of the surrender value of your policy.

How to apply for a loan against a life insurance policy?

The process for applying for a loan against an insurance policy may differ from one insurance company to another. But you can always contact your insurer's customer care and inquire about the entire application process, surrender value of the policy, the eligible loan amount, and the terms and conditions related to this.

What are the documents required?

To avail this loan, a policyholder will have to submit:

  • A loan application form
  • The original insurance policy document along with your address proof, ID proof, and income proof
  • 'Deed of Assignment’ which will assign your insurance policy in favor of your lender
  • A copy of a cancelled cheque
  • Payment receipt for the loan amount

What happens if you fail to repay?

If you fail to repay the loan taken against your policy, then the interest will keep adding to the balance amount. If the loan amount exceeds the insurance policy’s surrender/cash value, then this can become a reason for your policy lapse. The insurer can recover the loan amount and interest from the surrender value of your policy and may also terminate your insurance plan.

While the protective cover offered by a life insurance policy is its biggest benefit, the loan facility is a valuable add-on. But before you plan to avail such loans, make sure to go through the terms and conditions of the lender to avoid any discrepancies at the time of applying for a loan against an insurance policy.