What Is a Loan Against Insurance? Meaning, Process and Interest Rates

The only convenient way to deal with a financial emergency is to always be prepared. Medical expenses, home repairs, or other large expenses can be inconvenient, even for those with careful financial planning. In such cases, a loan against insurance allows eligible policyholders to access funds against their policy’s accumulated value without surrendering their coverage. This guide explains how loans against insurance work, including eligibility, the application process, and key considerations. 

What Is a Loan Against Insurance? 

A loan against insurance is a secured borrowing facility that allows policyholders to raise funds by pledging the surrender or paid-up value of an insurance policy as collateral. This option is typically available on traditional life insurance plans. The policy continues to provide life cover while the loan remains outstanding. 

Once the policy becomes eligible, the insurer assesses the accumulated amount and determines the loan amount based on applicable terms. Interest accrues on the outstanding amount, and any unpaid balance may be adjusted against future policy benefits or claim proceeds. 

Which Insurance Policies Allow Loans? 

Loans against insurance are available on life insurance policies that build value over time, subject to policy terms and conditions. Eligible policy types typically include endowment plans, money-back policies, and only some Unit Linked Insurance Plans (ULIPs) that meet the eligibility requirements. Generally, loans are not permitted on ULIPs because the policyholder bears the investment risk and the fund value fluctuates daily. Term insurance plans are not eligible for loans against insurance, as they provide pure life cover with no savings or accumulated value. 

How to Apply for a Loan Against an Insurance Policy? 

Applying for a loan against an insurance policy generally follows a simple process. 

Here are the steps to follow: 

Check Eligibility: Eligibility depends on the policy type and whether it has acquired a surrender or paid-up value. This usually takes about two to three years, varying slightly by product. 

Request the Loan: The policyholder submits a loan request via the insurer’s service channels, along with basic documentation, including policy details, proof of identity, and bank information. 

Get the Loan Value: The insurer then calculates the loan amount as a percentage of the surrender value. Insurers generally lend 80% to 90% of the surrender value. 

Approval: The loan is disbursed to the registered bank account, and the policy remains active for the loan tenure. This puts a lien on the policy, locking it from any further changes. 

Interest Rates and Repayment of Loan Against Insurance 

The interest rate on a loan against an insurance policy is generally lower than that of unsecured loans, as the policy’s surrender value acts as collateral. Rates are set by the insurer based on policy terms and may be fixed or variable. 

Repaying a loan taken against your life insurance policy is designed to be flexible, but it requires careful management to protect your long-term financial goals. 

How the Repayment Process Works 

• Flexible Interest Payments: Most insurers require you to pay the interest on a regular basis, such as half-yearly or annually. 
• Principal Repayment: You often have the freedom to repay the principal amount in a single lump sum or through multiple smaller payments during the policy's remaining term. 

Automatic Deductions: If the loan is not repaid, interest is accrued on the outstanding amount and adjusted against the policy’s surrender value, maturity proceeds, or death benefit, whichever comes first. 

Pros and Cons of Loan Against Insurance 

A loan against insurance can be a practical liquidity option in certain situations, but it also has limitations that policyholders should understand. 

Pros 

• Lower interest rates 
• No credit checks required, as the loan is secured against the insurance policy 
• The policy remains active for the loan tenure, preserving life cover 
• The application process is simpler compared to other borrowing options 

Cons 

• If the loan or accumulated interest is not repaid, it can reduce the payout from the policy’s surrender value, maturity proceeds, or death benefit 
• Prolonged non-repayment may cause the outstanding amount to exceed the policy’s value, resulting in a policy lapse and end of life cover. 
• The available loan amount is limited to a percentage of the policy value, which may not meet larger funding needs 

Conclusion 

A loan against an insurance policy can provide short-term liquidity without requiring policy surrender, as long as the policy has accumulated sufficient value. However, it is important to understand the eligibility conditions, repayment obligations, and how unpaid loans may affect long-term policy benefits. 

Frequently Asked Questions 

1. Can I take a loan against any life insurance policy? 

No. A loan against insurance is available only on policies that build surrender or paid-up value, such as endowment plans, money-back policies, and certain ULIPs. Term insurance plans do not qualify. 

2. What happens if I don't repay the loan? 

If a loan against an insurance policy is not repaid, accrued interest is adjusted against the policy’s surrender value, maturity proceeds, or death benefit, which may reduce benefits or cause the policy to lapse. 

3. Is a loan against insurance better than a personal loan? 

A loan against insurance generally offers lower interest rates, but the loan amount is limited by the policy's value.