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Need Funds – Borrow Loan Against Insurance Policy Or Surrender The Policy?

Financial institutions and banks have list of criteria’s which they follow while approving loan  applications of there consumers which is not known to us. These criteria’s if not satisfied can lead to rejection of your loan application. So it is better for every one of us to know what all alternatives do we have which can help us get the approval of our loan application at reasonable interest rate.

One of the alternative which can get you loan at lower interest rate is your insurance policy. If you are in a situation where your personal loan application has been rejected or your bank is offering you loan at higher interest rate then you can take the advantage of your insurance policy and get your loan approved at lower interest rate.

loan against insurace policy

ALSO READ : Ways To Exit From Unwanted Insurance Policy

ALSO READ : Terminating A Life Insurance Policy? Surrender Vs Paid Up – Which Is Better?

Points To Remember While Applying For Loan Against Insurance Policy

Pledging insurance policy to get loan is one convenient option available to policy holders but not every policy holder can apply for loan. There is some eligibility criteria which one need to fulfill before applying for loan against policy:-

  • Money Back Insurance Policies are not eligible for loan.
  • Policy holder should have paid at least 3 premiums against the policy.
  • Some banks do not offer loan against Unit Linked Insurance Plan (ULIP).
How Much Loan Amount You Are Eligible For On Applying Loan Against Insurance Policy?

The loan amount which your bank will offer you against your policy can vary depending on the type of policy you possess. In broader terms there can be two type of insurance policies – Traditional and ULIP. So lets have a look – how much loan you can expect on pledging your insurance policy?

Traditional Policies : Pledging traditional insurance policy can get you loan amount equivalent to 80 to 90% of the surrender value of your policy (How to calculate surrender value of policy?).

Unit-linked plans (ULIPs) : Pledging ULIP can get you loan amount depending on the current market value of the policy.

  • If your ULIP has invested 60% amount in the equity then you are eligible to get upto 40% as the loan amount.
  • If your ULIP has invested 60% in the debt funds, then you are eligible to get upto 50% as the loan amount.
Repayment Terms On Loan Against Insurance Policy

The repayment terms in case of loan against insurance policy is quite relaxed as compare to other loans. Terms and tenure depends on company to company and insurer to insurer:-

  • In some companies, loans have tenure of atleast six months which means if one like to repay the amount of loan before six months, he needs to pay interest for six months.
  • At most of the banks, there are no pre-payment or foreclosure charges on repayment of loan.
  • If insured fails to pay premium against which loan has been taken, the policy will lapse.
  • In case of death of the policyholder or maturity of the policy, the interest will be charged only up to the date of death or maturity.


If you are unable to figure out whether to borrow loan against insurance policy or surrender the policy. I would suggest you to avoid surrendering your insurance policy until no other option left. I the above discussion also we have seen the benefit of insurance policy. The real benefit of an insurance policy comes in the form of lower interest rate whenever you borrow loan against it.

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