How To Take A Loan Against Life Insurance Policy?

Updated On: 2024-02-15

Author : Team Policybachat

Are you aware that your life insurance policy can do more than provide financial protection for your loved ones in case of the unexpected? Imagine this - you can leverage your life insurance to secure a loan and address immediate financial needs. It’s an interesting concept that many policyholders might not be aware of.

In this article, we’ll unravel the secrets of how to take a loan against an insurance policy, exploring the benefits and considerations that come with this unique financial strategy. Let’s delve into the details of this lesser-known aspect of insurance policies and discover how you can turn your policy into a valuable financial asset.

What is a Life Insurance Policy Loan?

A life insurance policy loan refers to a facility provided by life insurance companies where policyholders can borrow money against the cash value of their life insurance policies. This type of loan allows policyholders to access a portion of the accumulated cash value within their life insurance policy while keeping the policy in force.

Getting a loan against your life insurance policy is a great alternative to taking out a personal loan. The interest rates are favorable and payments are more manageable. It is one of the most hassle-free solutions out there and has several advantages over other loan types.

How Does a Life Insurance Policy Loan Work?

A life insurance policy loan allows policyholders to borrow money against the cash value accumulated within their life insurance policies. The policyholder submits a loan application to the insurance company, specifying the desired loan amount. The loan is approved based on the policy’s cash value, and the policy itself serves as collateral for the loan. The insurance company charges an interest rate on the borrowed amount, and the policyholder is required to make regular repayments. If the loan is not repaid before the policyholder’s death, the outstanding loan amount and accrued interest are deducted from the death benefit paid to beneficiaries, potentially reducing the amount received by the policyholder’s heirs. It provides policyholders with a source of liquidity while keeping the life insurance policy in force, but careful consideration of the terms and potential impact on the policy is essential.

Things Should Know While Taking Out a Loan against Life Insurance

Here are several factors that you should know before getting a loan against the life insurance policy.


One of the first things you need to check is whether your insurance policy offers you a loan. Not all insurance plans offer loan facilities. For example, term life insurance policies don’t provide any cash value at maturity, so the policyholder can’t take a loan against that policy. However, money-back policies, endowment policies, whole life insurance policies, etc. usually provide this added benefit to policyholders. So, check all the eligibility before purchasing a life insurance policy.

Loan Amount

Another thing to keep in mind is the amount of loan you’re allowed to borrow. The insurer will specify the minimum and maximum amounts of money you’re eligible for. Consider this before proceeding with your financial plan. The loan amount that you're eligible for depends on the Surrender Value your policy has accrued over time. 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 90% of the Surrender Value of your policy.

Rate of Interest

Policyholders are required to pay interest to the lender for the insurance loans. The interest rate is usually linked to the base rate of a policy. The rates for loans against insurance policies tend to be lower than rates for personal loans. When taking out loans against your insurance plan, it’s important to be aware of the interest rates. Interest on loans against insurance plans generally differs from year to year. Make sure to keep a tab on the interest rates for the calendar year in which you plan to avail of your loan.

Waiting period

A policyholder can’t take a loan against their life insurance policy as soon as they’ve signed up. A waiting period of about 2 to 3 years is required, in which the lender checks that premiums have been paid or have defaulted during the waiting period.

Surrender Value

If your policy is approved for a loan, it’s possible that you can only avail of this facility if your policy has a surrender value. To get to that point, you will need to pay premiums for at least 3 years from the date of purchase. So, the loan is allowed based on surrender value.

Premium Amount

When you’re borrowing against your life insurance policy, make sure you keep paying the premiums. If you stop doing so, your insurer may terminate the policy. So, you should need to continue paying premiums from time to time.

Repayment of Loan

The loan should be paid back during the duration of the policy. The investor has the choice of paying back either the total amount or just interest. If you only pay interest, the principal amount will be deducted from the claim amount at the time of settlement

How to Get a Loan Against My Life Insurance Policy?

The application process to take a loan against your life insurance policy will vary from insurer to insurer and the type of life insurance policy you have. Below are the steps to get a loan against your life insurance policy online:

  1. Check Policy Type: Verify if your life insurance policy allows for loans because not all policies provide this option.
  2. Cash Value Assessment: Understand the cash value of your life insurance policy.
  3. Loan Eligibility: Contact your insurance company to inquire about your eligibility for a loan.
  4. Loan Application: Submit a loan application to your insurance company along with the documents required.
  5. Loan Approval: If the loan is approved, the insurance company will specify the loan amount, interest rate, and other terms and conditions.
  6. Loan Disbursement: Upon approval, the loan amount will be disbursed to you.

Documents Required to Get a Loan Against Life Insurance Policy in India

Here are the general documents required to get a loan against a life insurance policy.

  • Duly filled Loan Application Form
  • Policy copy or policy document of your life insurance policy.
  • Identity Proof: Aadhaar card, passport, voter ID, or driver's license.
  • Address Proof: Utility bill, rental agreement, or any other document accepted by the insurance company.
  • Bank Account Details including a cancelled cheque or a copy of the passbook.
  • Income Proof: Salary slips, income tax returns, or other relevant documents.
  • Recent passport-sized photographs.

Wrapping Up

A life insurance loan could be a lifesaver for most people and long-term plans can still be made while fulfilling short-term objectives, and financial needs. But before taking a loan against a life insurance policy always be aware of the risks, but these loans are an excellent source of funds to fulfil your emergency needs.

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