Loan Against LIC Policy in India: Citizen Guide

A loan against your LIC policy lets you borrow money from the insurer using your own policy as security, but only if the policy has built up a surrender value after you have paid premiums for a few years. The insurer lends you a part of that surrender value and charges interest until you repay.

This guide covers who can get such a loan, how much you can borrow, how to apply, how repayment works, and how it compares with a personal loan. The same idea applies to most insurers, but the exact numbers here are from LIC.

The most important rule is simple. You can only take a loan if your policy has a surrender value. A surrender value is the cash value your policy builds up once you have paid premiums for a minimum period.

LIC's policy guidelines state: “Surrender value is payable only after three full years premiums are paid to LIC.” So you usually need to have paid at least three full years of premiums before a loan is possible.

This means traditional savings policies are the ones that qualify, such as endowment plans, money-back plans, and whole-life plans. LIC says: “Many of our plans are of endowment type and you would be allowed to raise a loan against your policy should you require funds.”

What does not qualify:

• Term plans. A pure term policy is protection only. It has no surrender value, so there is nothing to lend against.
• Most ULIPs. Unit-linked plans work differently and most do not offer this kind of policy loan. Check your policy or ask the insurer.

If you are unsure, the quickest check is to ask whether your policy has a surrender value yet.

The loan is a percentage of the surrender value, not of the sum assured or the premiums you have paid. For LIC, the official limit is clear.

LIC states: “The maximum loan amount available under the policy is 90% of the Surrender Value of the policy (85% in case of paid up policies) including cash value of bonus.”

So:

• Up to around 90 percent of the surrender value on an in-force policy.
• Up to around 85 percent if the policy is paid-up, meaning you stopped paying premiums but it still has value.

The exact percentage and the rupee amount depend on your specific policy and insurer, so always confirm the figure for your own policy before you plan around it.

When you take the loan, the policy is assigned to the insurer as security. LIC's requirement reads: “Policy to be assigned absolutely in favour of the Corporation.”

Assignment means the title of the policy moves from your name to the insurer for the duration of the loan. LIC explains: “In case you are raising a loan against your policy from LIC or any other financial institution, your policy would have to be assigned to LIC or the financial institution.”

Once you repay fully, the policy is given back to you. LIC notes: “The policy would be reassigned to you on the repayment of the loan. A fresh nomination should be done after reassignment of the policy.” So after reassignment you may need to file a fresh nomination so the right person receives the claim.

Interest is charged on the loan, and for LIC it is usually paid half-yearly. LIC states: “The rate of interest charged on policy loan is declared by the Corporation every year and they are plan specific. Interest on loan is payable half yearly.”

Rates change from year to year and differ by plan, so do not rely on any fixed number you read online. Ask the insurer for the current rate on your plan.

You have flexible repayment. LIC says: “You repay the loan with interest or continue paying the interest and allow the loan to be deducted at the time of the claim payments.”

So you can:

1. Repay the principal plus interest whenever you have funds, or
2. Keep paying only the interest and let the outstanding loan be deducted later.

If the policy matures or a death claim arises while the loan is open, any outstanding loan plus interest is deducted from the payout. The family or you receive the balance after that deduction.

For LIC you have two common routes.

1. Online. If you are registered on LIC's e-Services portal and your policy is eligible, you may be able to request an online loan from your account. Log in at the official LIC website and look for the policy loan option.
2. At a branch. Visit your servicing LIC branch with your original policy document and identity proof, fill the loan application, and sign the assignment endorsement on the policy.

For other insurers the steps are similar. Contact your insurer or agent and ask for their policy loan form.

Reasons it can be attractive:

• It uses money your own policy has already built up, so approval is usually simple with little extra paperwork.
• Interest is often lower than an unsecured personal loan because the policy is the security.
• Your life cover continues while the loan runs, as long as you keep the policy in force.

Things to watch:

• You are borrowing against your own future maturity money. Whatever is unpaid is cut from the final payout.
• If you ignore the loan and interest keeps adding up, the debt can grow towards the surrender value. If it crosses that value, the policy can lapse or be closed to recover the dues, and your cover can end.
• The loan amount is limited to a part of the surrender value, so it may be smaller than what a personal loan offers.

A loan against your policy suits short-term needs where you intend to repay. It is not a substitute for a large personal loan.

• Assuming a term plan can be used. It cannot, because it has no surrender value.
• Forgetting to pay the half-yearly interest and letting the debt build up quietly.
• Not filing a fresh nomination after the policy is reassigned to you on repayment.
• Treating the borrowed money as a bonus. It is a loan, and it reduces your maturity or claim amount until repaid.

No. A pure term plan has no surrender value, so there is nothing to lend against. Loans are available on savings type plans such as endowment, money-back, and whole-life policies that have built up a surrender value.

LIC allows up to 90 percent of the surrender value on an in-force policy and up to 85 percent on a paid-up policy, including the cash value of bonus. The exact amount depends on your policy, so confirm it with LIC for your case.

Your policy must first have a surrender value. LIC says surrender value is payable only after three full years of premiums are paid, so you usually need at least three full years of paid premiums before a loan is possible.

Any outstanding loan plus interest is deducted from the maturity amount or the death claim. Your nominee or you receive the balance after that deduction.

If the loan plus unpaid interest keeps growing and crosses the surrender value, the policy can be closed to recover the dues, which can end your cover. Keep paying at least the interest to avoid this.

1. Check whether your policy has a surrender value yet, usually after three full years of premiums.
2. Ask LIC or your insurer for the exact loan amount and the current interest rate on your plan.
3. Apply online through your insurer's portal or at the branch with your policy document.
4. Keep paying the interest on time and plan to repay, so the loan does not eat into your maturity money.

For a wider toolkit on using your right to information to get clear answers from public bodies, see The RTI Playbook.

By Dr. Shrawan Kumar Pathak