Loan Against Your Life Insurance Policy: Meaning, Eligibility, Documents & How to Apply

Life insurance policies such as endowment and money-back plans allow policyholders to obtain loans. They can borrow up to 80% of the surrender value at an average interest rate of around 9–9.5% per annum. These loans require no credit score, are generally tax-free*, and any unpaid amount is deducted from the maturity benefit. This makes borrowing against your life insurance a quick and flexible way to access funds during emergencies. In this article, let's explore what a loan against a life insurance policy is, how it works, and the key points to consider before taking one.
 

What is Loan against Policy?

An insurance policy has become one of the most versatile financial instruments. You can also resort to it for availing a loan facility. When you get a loan by offering your insurance policy as a security, it is a loan against the policy. Here your life insurance policy acts as the collateral, thereby making it a secured loan.
 

How does a loan against an insurance policy work?

Taking a loan against your life insurance policy is straightforward:

• Check Eligibility: Only certain policies like endowment plans or ULIPs can be used, as term plans don’t have a surrender value.
• Determine Loan Amount: The loan is usually based on the surrender value of your policy, often up to around 80–95% of it.
• Policy as Collateral: Your insurance policy is pledged to the lender as security, but you continue to hold and benefit from the policy.
• Disbursal of Funds: Once approved, the loan amount is typically transferred within a day or two.
• Repayment: Repayments can be made in fixed EMIs or only the interest can be paid on the portion you use.

This allows you to access funds when needed while keeping your insurance protection intact.

Benefits of Taking Loan Against a Life Insurance Policy

Availing a loan against a life insurance policy offers the following benefits.

• Secured Funding: A policy loan is a secured loan, and hence carries a relatively lower interest rates than unsecured personal loans. This aids in enjoying decent savings in the form of reduced interest rates.
• Quick and Easy: The loan gets sanctioned majorly based on your insurance policy. It does not include multiple processes, as in the case of other funding instruments. An application form, along with the policy documents are often sufficient. Thus, the process of availing the loan is seamless and hassle-free.
  
  However, the loan comes with a few concerns, as listed below.
  
  
• Repayment: Some insurance companies disburse the loan subject to a minimum tenure. For instance, an insurance company disburses a loan subject to a minimum tenure of six months. In this case, the loan must be active for the six-month tenure and shouldn’t be repaid. Thus, even if you have are capable of repaying, you cannot make the payments.
• Reduction of Death Claim: Uncertainties, adversities can set in during the policy tenure and before the payment of the loan. During such times, the recovery of dues takes place from the claim amount. Hence your nominees do not receive the entire death benefits. This could adversely affect the financial corpus planned for the security of your loved ones.
   

Important things that you should know about loan against life insurance policy

Here are some key things you must know before you opt for a loan against your policy.

• Eligibility - Loan against insurance policies are given on the surrender value. This is the amount that the policyholder receives on a pre-mature exit from the policy. Besides, it is important to know what life insurance you can borrow against. Policies with maturity benefits can act as security for the proposed funding. Hence, term insurance is not eligible to avail a loan. Besides, the policy submitted as security should be at least three years old. It should also have a track record of timely premium payments.
  
  
• Loan Amount - The loan amount is usually a percentage of the surrender value. In the case of Unit Linked Insurance Plans (ULIP), the loan amount depends on the market value of the corpus along with the fund type. However, some ULIPs are not qualified for availing loans. Hence, it is important to check eligibility with your insurer.
  
  
• Interest Rate - The rate of interest depends on the amount and number of premiums paid. The higher the amount and number of paid premiums, the lower the interest rate can be. Bankers link the interest rate with their base rate; hence, any changes in the base rate influence the interest costs. Moreover, they consider the loan against the policy as an overdraft facility. Hence,the bank’s interest rates are normally more than that of an insurance company.
  
• Repayment - The lender intimates the repayment schedule. It is typically spread across the policy period. You may opt to repay the principal amount along with interest payments or make only the interest payments. In the latter case, the principal amount gets deducted from the claim at the time of settlement. Similarly, in case of the demise of the policyholder during the policy term, the nominees receive the net amount post adjustment of the dues.
  
  Defaults in the loan availed can result in the foreclosure of your policy for recovery of the dues. Hence, it is important to ensure timely repayment of the obligations. 

   

What is the eligibility for a loan against life insurance policy?
 

Let's see the eligibility criteria for loans against life insurance policies.

• The insurance policy should be accepted by the lender.
• The loan can be availed by individuals, companies, partnerships, HUFs, or sole proprietorships.
• Borrowers must be between 18 and 90 years of age.
• Both salaried and self-employed individuals are eligible.
   

How to apply for loan against insurance policy?
 

Follow the steps below to apply for a loan against insurance policy.

Step 1: Start the Application

Click on the ‘Apply’ button available on the lender’s website or portal to begin the process. This allows you to find the online loan application form.

Step 2: Provide Basic Details

Enter your personal information, such as name, date of birth, PAN, and contact number. This helps the lender create your preliminary loan profile.

Step 3: Verify Your Email

Provide your email address and verify it through the link sent to your inbox. This ensures secure and authenticated communication throughout the process.

Step 4: Add Policy Details

Fill in your insurance policy details—like policy number, insurer name, and plan type. These details help determine the surrender value and the eligible loan amount.

Step 5: Get a Personalised Loan Offer

Based on your policy’s value and eligibility, you’ll receive a customised loan offer with the proposed amount and applicable interest rate.

Step 6: Complete KYC Verification

Upload your KYC documents or complete Aadhaar-based e-KYC. This quick verification step helps confirm your identity and address for loan approval.

Step 7: Set Up Auto-Repayment (E-Mandate)

Register an e-mandate to enable automatic EMI payments. This ensures timely repayments without manual tracking.

Step 8: Review and Accept Terms

Go through the loan agreement and repayment terms carefully. Once you accept, the lender prepares your loan for final approval.

Step 9: Submit Your Policy Document

Provide your insurance policy document as collateral. The lender will temporarily assign the policy to secure the loan.

Step 10: Receive Funds

After verification, the approved loan amount is credited directly to your bank account within a short time.
 

What are the documents required to apply for a loan against life insurance policy online?

To process your loan, you’ll need to provide standard documents that confirm your identity, address, and policy details:

• Identity Proof: Aadhaar Card, Passport, or Voter ID
• Address Proof: Recent utility bill, rent agreement, or any government-issued ID showing your address
• PAN Card: For income verification and compliance purposes
• Policy Document: The original or a copy of the life insurance policy being pledged as security
• Bank Proof: Cancelled cheque, bank passbook, or a recent bank statement to verify your account details
• Additional Documents: Any declarations or forms the lender may ask for during verification

Once all documents are submitted, loan approval typically takes 24-48 hours, and the amount is disbursed shortly after verification.
 

Personal Loan vs Life Insurance Policy

The table below highlights the key points of comparison to help you make an informed choice:

Feature	Loan Against Insurance Policy	Personal Loan
Collateral Needed	Yes (Insurance policy is pledged as security)	No collateral required
Interest Rate	Generally lower	Usually higher
Loan Disbursal Time	Within 24–48 hours depending on the lender	Typically, 2–7 days but varies with providers
Impact on Coverage	No impact on policy benefits if premiums are paid	Not applicable
Prepayment Charges	Usually nil, but some firms may still levy it, depending on the terms and conditions.	May apply depending on lender

Things to consider before applying for loan against insurance policy

A loan against your insurance policy may be a convenient way to access funds, but it’s important to understand a few key points before applying:

• Repayment Effect: If the loan isn’t repaid on time, the outstanding amount is adjusted from your policy’s surrender or maturity value.
• Market Risk (for ULIPs): In the case of ULIP policies, the surrender value may change depending on market performance, which can affect the loan amount you’re eligible for.
• Eligible Policy Type: Only policies with a surrender value, such as endowment or ULIP plans, qualify for this type of loan. Term insurance plans are not eligible.
• Policy Assignment: When you take the loan, your policy is temporarily assigned to the lender as security. Once the full loan is repaid, ownership of the policy is transferred back to you.
• Effect on Insurance Benefits: If the policyholder passes away during the loan tenure, the pending loan amount is deducted from the policy’s death benefit before it is paid to the nominee.
   

Key highlights of loan against insurance policy

Here’s a quick overview of the key highlights of taking a loan against your insurance policy:

• Eligible Policies: Applicable for endowment and ULIP plans
• Loan Limit: Up to 95% of the policy’s surrender value
• Interest Charges: Flexible loans, with interest levied only on the used amount
• Insurance Benefits: Your policy and investment returns remain unaffected
• Loan Tenure: Varies with lenders and life insurance policies
• Documentation: Minimal paperwork required
• Disbursal Time: Typically, within 24–48 hours*
   

Conclusion
 

A life insurance policy is a flexible financial instrument. It can offer financial funding during times of needs. Having said this, the primary objective of an insurance policy is to financially protect your family in your absence. Hence you must exercise due caution while availing any loan facility in future. Your debt obligation shouldn’t impact the financial security of your family.