A loan against insurance policy is a lesser-known yet valuable facility that allows policyholders to borrow funds by pledging their life insurance policy as collateral. It is a secured loan and provides quick access to liquidity without needing to surrender or cancel the policy. For individuals with ongoing life insurance coverage, especially from providers like the Life Insurance Corporation of India (LIC), this facility can serve as a reliable financial buffer during times of need.
In this article, we explain when and why to consider a loan against an insurance policy, how it works, its benefits, and what you should know about LIC policy loan interest rate in 2025.
Understanding how a loan against insurance policy works
A loan against insurance policy is issued by insurance companies or banks by accepting the policy’s surrender value as security. The surrender value is the amount available to the policyholder if the policy is voluntarily terminated before maturity. Loans are typically provided as a percentage of this surrender value—usually up to 85% to 90%.
Only specific types of life insurance policies are eligible for loans. These include:
- Traditional endowment policies
- Whole life insurance plans
- Money-back policies
- Certain ULIPs with guaranteed returns
Term insurance plans are not eligible because they do not accumulate any cash value.
Once the policy is pledged, the insurer places a lien on it, and the policyholder receives the loan disbursement. The policy continues to remain active, and the sum assured remains unaffected as long as the interest is paid and the loan is repaid.
When to consider taking a loan against an insurance policy
There are several situations where borrowing against your insurance policy may be a practical solution:
During urgent financial needs
If you are facing a medical emergency, unexpected home repairs, or tuition fee payments, and you want to avoid high-interest personal loans, borrowing against your policy can offer quick and affordable liquidity.
When you want to avoid surrendering the policy
Surrendering a policy not only disrupts your long-term financial planning but may also result in losses, especially if the policy has not completed its lock-in period. Taking a loan allows you to retain the policy and its benefits while resolving short-term financial needs.
For short-term business capital
If you are self-employed or run a small business, borrowing against an insurance policy can help cover working capital needs without affecting credit lines or overdraft limits from other institutions.
When you do not have a strong credit score
Since a loan against an insurance policy is secured, lenders generally do not require a high credit score. This facility is accessible even to those with limited or low credit history.
As an alternative to gold loans or loans against FDs
If you have both life insurance and fixed deposits, and you do not wish to liquidate your assets or jewellery, this loan option offers an alternative with potentially better terms.
Why consider this facility in 2025?
In 2025, personal finance strategies are being reshaped by economic uncertainty and changing interest rates. A loan against insurance policy provides a sense of financial control in a time when many are looking to protect both their wealth and liquidity.
Some compelling reasons to consider this in the current year include:
- Stable interest costs: Compared to the rising cost of unsecured loans, insurance-based borrowing offers fixed and reasonable rates.
- No income proof required: Especially useful for freelancers, gig workers, or retirees.
- Digital access: LIC and other insurers now offer online loan applications and approvals, making the process quicker than ever.
LIC policy loan interest rate and terms
If you have an LIC policy, you can borrow against it directly through LIC or through banks that accept LIC policies as collateral. The LIC policy loan interest rate is generally lower than that of personal loans or credit card interest.
LIC policy loan interest rate in 2025
As of 2025, the LIC policy loan interest rate is typically:
- Around 9% to 10% per annum, compounded half-yearly
- May be slightly higher for new policyholders compared to older or long-standing policy terms
- Subject to change depending on policy type and market conditions
Additional conditions and repayment terms
The loan tenure usually matches the remaining term of the insurance policy or is capped at a fixed period, such as 3 years.
- Interest must be paid regularly—typically half-yearly.
- If the borrower fails to repay interest or principal, the outstanding amount is deducted from the policy payout at maturity or from the death benefit.
- Prepayment or early repayment is allowed with no additional fees in most cases.
Being aware of the LIC policy loan interest rate and terms helps ensure that you do not default or compromise your policy’s benefits.
Similarly, a Loan Against Securities can offer competitive interest rates and flexible repayment options based on the type and value of securities pledged. It’s a convenient way to raise funds without breaking long-term financial plans.
Benefits of borrowing against your life insurance policy
Taking a loan against your life insurance policy offers several advantages over traditional loans:
- Quick processing and disbursal: Especially if you borrow from the same insurer.
- No impact on credit score: The loan is not reported to credit bureaus unless defaulted.
- Continued life cover: Your insurance policy remains active during the loan tenure.
- Low documentation: No income verification or extensive paperwork required.
- No foreclosure charges: You can repay the loan early without any penalty.
These benefits make it a suitable option for individuals looking for low-risk, short-term funding.
Points to consider before applying
Although borrowing against your insurance policy can be beneficial, it is important to assess the following before proceeding:
- Check surrender value: The higher the surrender value, the greater the eligible loan amount.
- Understand interest compounding: Interest is compounded semi-annually, so it is advisable to repay it regularly to prevent ballooning costs.
- Avoid policy lapse: Non-repayment may lead to policy lapse or a reduced maturity benefit.
- Compare alternatives: Weigh this option against loans against fixed deposits or mutual funds to choose the best fit.
Conclusion
A loan against insurance policy offers a practical, accessible, and cost-efficient way to borrow funds in times of need. With relatively low interest rates, minimal documentation, and continued life cover, it serves as a useful financial tool—especially for individuals who want to avoid the burden of high-cost unsecured loans.
In 2025, as borrowing trends evolve and policyholders seek smarter financial solutions, understanding the LIC policy loan interest rate, eligibility terms, and benefits can help you use this facility to your advantage. Whether you need short-term liquidity for personal or professional reasons, a loan against your life insurance policy can be a reliable bridge—if managed with care and planning.
