Insurance

Loan against life insurance policy – Unlock funds without surrendering your cover

By Tata Capital
15 April 2026
10 mins read
3422

A life insurance policy is one of the most useful financial tools. It helps ensure your loved ones’ financial well-being, even in your absence. In case of the policyholder’s unfortunate demise during the policy term, the insurer provides a lump sum amount to the nominee. This support helps dependents manage daily expenses and maintain their standard of living without facing any financial strain.

However, there is another benefit that many people are not aware of. A life insurance policy can also be used to access quick funds during a financial emergency. You can avail of a loan against a life insurance policy without surrendering your cover. It offers benefits such as quick liquidity, continued protection, and competitive interest rates.

In this blog, we will explain in detail what a loan against insurance is, how it works, along with its features, benefits, eligibility criteria, and more. Keep reading.

What is a loan against a life insurance policy?

A loan against a life insurance policy is a secured loan where you pledge your eligible life insurance policy as collateral to borrow funds. The lender offers a loan amount based on the policy’s surrender value. You won’t have to sell or cancel your policy.

Your policy continues as usual, and you still enjoy life cover and other benefits during the loan tenure. This is different from surrendering the policy, which typically ends the cover.

You can use the borrowed amount for various needs, such as medical emergencies, education, business expenses, or personal requirements.

How does a loan against a life insurance policy work?

In a loan against a life insurance policy, your policy is assigned to the lender as security or collateral. The maximum loan amount is based on the policy’s surrender value. Most lending institutions allow you to borrow up to 90% of this value.

You continue to pay interest during the loan tenure, and your policy remains active. Repayment is usually made through EMIs (Equated Monthly Installments). They typically include both interest and principal components.

If you fail to repay the loan amount, the lender may seize your policy to recover its dues. After deducting the outstanding balance amount from the surrender value, the remaining amount is paid to the nominee.

Key features and benefits of a loan against a life insurance policy

A loan against a life insurance policy can be a highly useful option during emergencies or for meeting short-term needs. It offers a practical way to access funds without disturbing your long-term financial security. Since it is a secured loan, it usually comes with lower interest rates, quick processing, and minimal documentation. You can also benefit from flexible repayment options while continuing to enjoy the life cover.

Fast access to funds without policy closure

One of the biggest advantages of a loan on a life insurance policy is quick access to funds. You can apply for it online and get the funds in your bank account within a few minutes. You do not have to run from pillar to post or surrender your policy. It not only helps in saving your precious time but also provides adequate liquidity during a financial crisis.

Flexible repayment options

Most lenders offer flexible repayment options for these loans. For example, you can choose to pay only the interest during the loan tenure. The principal amount can be paid in a single bullet payment at loan closure. Some lenders also allow you to make prepayments without any additional charges. This gives you control over your cash flow and allows you to plan your repayment based on your income.

Continue enjoying life cover benefits

Your life insurance policy stays active even after taking the loan. You and your family continue to enjoy the benefits of the policy. There is no change in coverage if EMI payments are made on time. However, if you default on your loan, the lender may deduct the outstanding balance from your policy’s surrender value or claim amount.

Also,read – Loan Against LIC Policy: Interest Rate, Eligibility and How to Apply

Eligible insurance policies for availing a loan

Not all life insurance policies are eligible for securing a loan. The policy must have a surrender value. The lender sanctions the loan amount based on this value. Also, the policy should be active and have no outstanding loans against it.

In general, the following types of policies are eligible for a loan against insurance:

Endowment policies: These policies provide a lump sum if the policyholder survives the policy term. They are commonly accepted as collateral by lenders.
Money-back policies: These policies provide periodic payouts after a specific period. The accumulated surrender value makes them eligible for loans.
Whole life policies: They provide lifelong coverage to the policyholder and accumulate cash value over time. Lenders may accept them based on specified conditions.
ULIPs: These are market-linked insurance plans. Some lenders provide loans against ULIPs based on their fund values.

Loan amount, interest rate, and repayment terms

The loan amount, interest rate, and repayment terms for a loan against a life insurance policy depend on several factors. These include the policy’s surrender value, the borrower’s credit profile, and the lender’s internal policies. Terms may vary across lenders. It is important to read the loan agreement carefully to understand charges, conditions, and repayment rules before applying.

Maximum loan based on surrender value

Lenders typically decide on the maximum loan amount you can borrow based on your policy’s surrender value. In most cases, you can borrow up to 80% to 90% of this value. The exact percentage may vary depending on the insurer and lender. Policies with a high surrender value qualify for a higher loan amount. It is always useful to check the eligibility limit before applying.

Interest rate structure and reference rates

The loan against a life insurance policy interest rate depends on the lender’s policy and your credit profile. Borrowers with strong credit scores may get better rates. The rates can be fixed or floating. Fixed rates remain the same throughout the loan tenure, while floating rates may change based on market benchmarks. It is important to compare offers from multiple lenders before zeroing in on one.

Repayment options and tenure details

Repayment terms for these loans are usually flexible. You can choose a convenient tenure between six and twelve months. Some lenders also allow you to extend the loan tenure until the policy term. You can even choose to repay the loan amount via regular EMIs or a lump sum at the end of the tenure. Delayed or missed EMI payments may attract penalties and can also hurt your credit score.

Eligibility criteria for a loan against a life insurance policy

Eligibility for a loan on a life insurance policy depends on several factors. These include the applicant’s age, active policy status, income level, credit score, and the policy’s minimum surrender value. The policy must be in force and have built sufficient value over time.

Lenders may also assess your repayment capacity to determine your eligibility. It is important to note that the eligibility criteria may vary from one lender to another.

Who can apply?

Anyone can apply for a loan against a life insurance policy, provided they meet the lender’s basic eligibility criteria. Here are the usual guidelines that most lenders in India follow:

Age: The applicant must be between 18 and 60 years old.
Employment: The applicant can be salaried or self-employed.
Policy: The policy must be in force and not lapsed.
Minimum surrender value: Most lenders require a minimum surrender value of Rs. 10,000.
Credit score: The applicant’s credit score must be 700 or more.

Documents required for loan processing

Lenders typically require the following documents to process a loan against a life insurance policy:

KYC documents: Include basic ID and address proof. It can be your PAN card, Aadhaar card, voter’s ID card, driving license, or Passport.
Policy document: Original life insurance policy certificate or bond, surrender value statement, and the policy assignment letter.
Bank statements or a cancelled cheque.
Duly filled loan application form.
Recent passport-sized photographs.

Note that this list is indicative. The lender may ask for some additional documents during loan processing.

Fees and charges applicable

Apart from the interest charges, the lender may levy the following fees/charges on a loan against a life insurance policy:

Processing fees: Charged by the lender for reviewing and handling the loan application. Usually expressed as a small percentage of the sanctioned loan amount. Some lenders also charge a flat fee.
Late payment penalty: Usually charged as a flat fee if the loan EMI is delayed or missed. Some lenders also impose penal interest on the overdue amount.
Foreclosure charges: Levied only if a borrower repays the loan amount before the end of its original tenure.
Loan recovery fee: Levied only if the borrower defaults on the loan and the lender initiates recovery proceedings.

Since charges can vary by lender, it is advisable to check the latest fee schedule and read the loan agreement carefully before proceeding.

Also,read – Types Of Credit Insurance In India

Step-by-step process to apply for a loan against an insurance policy

Most lending institutions in India allow you to apply for a loan on a life insurance policy online. Here’s the step-by-step guide to do so:

1. Check your eligibility

Check if you are eligible to apply for a loan on a life insurance policy with a lender.

2. Fill out the application form

If eligible, proceed to fill out an online loan application form on the lender’s website. Ensure you input all details correctly.

3. Submit the required documents

Submit the required documents along with the policy assignment letter. You can upload them directly to the lender’s website.

4. Wait for the lender’s approval

Wait until the lender verifies your documents and provides approval for the loan.

5. Get money in your bank account

Upon successful approval, the loan amount will be disbursed directly to your bank account.

Important considerations before taking a loan against insurance

Before you apply for a loan on a life insurance policy, here are a few things you should keep in mind:

Understand the potential impact on your policy benefits. If the loan remains unpaid, it may reduce the final maturity value or the death claim.
The interest may continue to accrue over time, thereby increasing your total liability.
If the dues exceed the surrender value, you may lose all policy benefits. The insurer may terminate your policy before the maturity date.

What happens if you fail to repay the loan?

If you fail to repay your loan within the normal tenure, the lender may offer you a grace period to make the payment. You can repay the outstanding amount, along with the late payment charges, within this period. However, if you are still unable to repay the loan after the grace period, the lender reserves the right to deduct the dues from your policy’s surrender value.

In case of the borrower’s death before repayment, the lender deducts the outstanding balance (along with interest) from the death claim. The remaining amount, if any, is paid to the nominee.

Hence, it is important to repay the loan on time. Proper planning can help you use this option wisely without affecting your long-term financial security.

FAQs

What is a loan against a life insurance policy?

A loan against a life insurance policy is a secured loan where you use your policy as collateral. The lender gives funds based on the policy’s surrender value. Your policy stays active, and you continue to receive its benefits while repaying the loan.

How is the loan amount calculated against the surrender value?

The loan amount is calculated as a percentage of the policy’s surrender value. Most lenders offer around 80% to 90% of this value. The exact amount depends on the insurer, policy terms, and lender policies. A higher surrender value usually means a higher eligible loan amount.

Which types of life insurance policies are eligible for a loan?

Not all life insurance policies are eligible for a loan. Lenders usually accept policies that have a surrender value. These include endowment plans, money-back plans, whole life policies, and some ULIPs. Term insurance plans are generally not eligible since they don't have a surrender value.

What are the interest rates on a loan against an insurance policy?

The loan against a life insurance policy interest rates start from 8% per annum. The exact rate depends on factors like surrender value, borrower’s credit profile, and loan terms. Since it is a secured loan, rates are generally lower than personal loans.

Can I continue my life cover benefits after taking the loan?

Yes, you can continue your life cover after taking a loan against your policy. The policy remains active, and all benefits stay intact. However, if you fail to repay the loan amount or interest, the lender may deduct the dues from the final claim or maturity value.

What happens if I fail to repay the loan on time?

If you fail to repay the loan on time, the lender can recover the dues from your policy’s surrender value. It includes both outstanding principal and interest. If dues become too high, the policy may lapse, and your life cover could be lost.

Are there any processing fees or prepayment charges applicable?

Yes, there can be processing fees and prepayment charges on a loan against a life insurance policy, but they vary by lender. The processing fee is usually charged at the time of disbursal and may go up to 3% of the loan amount. A prepayment or foreclosure charge is levied if the borrower pays off the loan before the scheduled date.

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Loan against life insurance policy – Unlock funds without surrendering your cover

What is a loan against a life insurance policy?

How does a loan against a life insurance policy work?

Key features and benefits of a loan against a life insurance policy

Fast access to funds without policy closure

Flexible repayment options

Continue enjoying life cover benefits

Eligible insurance policies for availing a loan

Loan amount, interest rate, and repayment terms

Maximum loan based on surrender value

Interest rate structure and reference rates

Repayment options and tenure details

Eligibility criteria for a loan against a life insurance policy

Who can apply?

Documents required for loan processing

Fees and charges applicable

Step-by-step process to apply for a loan against an insurance policy

Important considerations before taking a loan against insurance

What happens if you fail to repay the loan?

FAQs

What is a loan against a life insurance policy?

How is the loan amount calculated against the surrender value?

Which types of life insurance policies are eligible for a loan?

What are the interest rates on a loan against an insurance policy?

Can I continue my life cover benefits after taking the loan?

What happens if I fail to repay the loan on time?

Are there any processing fees or prepayment charges applicable?

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