The Checklist for Buying a Loan Against Your Life Insurance Plan

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In your entire lifetime, there will be situations where you will require a significant amount of money. The situation may involve things like house renovation or an upcoming wedding, which cannot be delayed anymore; how would you then arrange for the required funds?

Usually, people tend to apply for gold or personal loan or use their property as collateral security for money. While these options may serve you just fine, as a borrower you need to know about another possible option available to you for raising funds: Obtaining a loan against your life insurance plan.

The main objective of this insurance policy is offering a risk cover to the policyholder, which provides a death benefit to the beneficiary, in case of the demise of the life assured. Apart from this, life coverage plans come with various other benefits, making them a good investment option.

In case you find yourself in the middle of some financial stress, you can put your insurance policy to use by getting a loan against it. It will treat your ears when you hear (or in this case, your eyes when you read) that a majority of financial institutions will be ready to provide you with a loan when you offer your life cover policy as collateral.


Since you know you can get a loan against your policy, here is a checklist for the same.

1)     Eligibility of the Policy for the Loan Facility

Not all insurance plans offer the facility of loan. Since the policies that are term-linked don’t provide policyholders with any cash value at the time of maturity, they will not be able to take a loan against these policies.

There are many ULIP plans also that are not eligible for the option of loan. However, endowment, money-back, whole- life plans, and more generally offer this added privilege to the policyholders. 

2)     Maximum Loan Amount Available

The maximum loan amount that you can borrow is dependent upon the surrender value acquired by your life cover plan. However, banks and other insurance providers won’t provide you with a loan on the whole surrender value. They will instead offer you a certain percentage of the surrender value of the policy.

The amount of loan that is available to the policyholder may be different for an insurance provider and a bank. 

3)     Surrender Value of the Plan

Another important thing to keep in mind is that even though your plan is pre-approved for the loan, you can only get this facility if the policy has earned some surrender value.

For gaining a surrender value, you will have to make regular repayments of your premiums for the initial few years of your policy. 

4)     Rate of Interest Applicable to the Loan

Just like any other loan, the policyholders will have to make payment of interest to the loan provider regularly. The rate of interest is generally linked to the base policy rate. The rate of interest on the loans obtained using the insurance plans are lower as opposed to the rates of interest on personal loans.

In some situations, the insurance providers and banks will let the borrowers make the payment of interest only during the term of the loan. They can settle the amount of principal at the time of the maturity of their plan. The rates of interest on the loan will be depending upon the prevailing rates of interest of the policy.  

5)     Applying for the Loan through the Life Insurance Plan

The process to apply for such a loan will be a little different in different places. In order to apply for this loan, the policyholders will have to call an insurance representative at the insurance company and ask for the details on the application process, surrender value of the plan, and other necessary terms & conditions. 

6)     Repayment of such Loans

When you take a loan against your insurance plan, the term of the loan is the same as the term of the policy. Being the policyholder, you will have to make all the due payments before the policy term ends.

The repayment term may vary from one lender to another. Most of the lenders will let their customers pre-pay the loan amount, with no extra charges. 

The Bottom Line!

Originally, the main objective of the life insurance plan is to offer a protective cover. However, these insurance plans are way more versatile options these days, offering the policyholders the benefit of getting the loan through their life coverage plans.

Hence, it does not just provide security, but also helps the policyholders when they are going through a financial crunch in life.

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