How to Get a Loan Against LIC Policy
A life insurance policy aims to give financial protection to the survivors of the policyholder in the event of the death of the insured. There are different kinds of policies that give this benefit- Term insurance plans, endowment, money back, whole life, or Unit Linked Insurance Plans.
Term insurance policies pay the sum insured only in the event of death. On the other hand, endowment policies/money back policies or Whole Life policies make payments to the insured on surviving a certain number of years or on maturity.
For Example:
The payback may happen on 15 years of policy payment, getting to a certain age like 50, 60, etc. The maturity benefit (sum insured) in a moneyback policy can also be paid in installments. In addition to payment of maturity benefits, the sum insured as a lump sum amount is paid in case of the death of the insured.
Life Insurance Corporation or LIC is the biggest insurer in India which issues term plans as endowment policies. The same is done by many other private sector insurers like ICICI Prudential, HDFC Life, SBI Life, etc.
What is a Loan Against LIC Policy?
A loan is a LIC policy is a loan that can be availed against the security of your LIC policy. The policy gets assigned to the lender till the loan is paid back in full by the borrower. If the borrower is unable to pay the loan back, then the lender gets all the benefits that are accrued to the policy.
During the term of the loan, the insured will continue to pay premiums on the policy, as usual, the life cover will also continue.
A loan against an insurance policy is also available when the insurance policy is available from a private insurer.
What Kind of LIC Policy Can Be Used for Availing a Loan?
As explained earlier, Life insurance policies can either be term policies or policies with a surrender value. However, only endowment or money-back policies are allowed to be given as collateral/security against a loan. This is because, in terms of insurance plans, the sum insured is payable only when there is the death of the insured. Unit Linked Insurance Policies that have values linked to .he stock markets also may not be accepted as security for a loan by all lenders.
In other words, only those policies that have a guaranteed surrender value can be eligible for availing a loan. The surrender value of an insurance policy is the value payable when the policy is surrendered on any date.
Where Can a Loan Against a LIC Policy Be Availed?
A loan against a LIC policy can be availed from the insurer, Life Insurance Corporation of India, or LIC Housing Finance. Many banks also offer loans on LIC policies or policies issued by other private insurers
Some of the banks that allow loans against LIC policies are:
- Kotak Mahindra Bank
- Axis Bank.
- State Bank of India
- HDFC Bank
What is the Interest Charged on a Loan Against the Insurance Policy?
The Life Insurance Corporation of India charges an interest rate in the range of 9-10% depending upon the insurance plan. While banks charge in the range of 10-15% for a loan against an insurance policy. But many of the banks offer loans/overdrafts against LIC/other insurance policies only to their account holders.
How to Avail of a Loan Against a LIC Policy?
There are two ways of availing a loan against a LIC/Insurance Policy. Both online and offline channels can be used to get a loan depending upon the one which you are comfortable with.
Online Way of Getting a Loan Against LIC Policy
The online way of getting a loan against an insurance policy is available only with the insurance companies. LIC offers an option to its subscribers to apply for a loan on its online portal.
The process is fairly simple which is described as below
- Register yourself on LIC portal.
- Go to the tab of Online Services
- Click on the Online Loan option
- This takes you to the Online Policy Options where you can place a request for a loan under the Online Loan Request Tab.
- After placing the request, you may need to upload your KYC documents for verification
The screens for the steps are given below for your convenience
Getting a Loan By Offline Method
To get a loan by offline method, you would need to follow the steps mentioned below
- Approach the nearest LIC office or a bank branch with the required documents like the policy document and the KYC documents like your identity and the address proof.
- Sign the required application form and get the particulars of the loan like the interest charged, tenure of the loan, etc
- Finally, you get the loan in a lump sum or as an overdraft
What is the Amount of Loan that is Available Against the Insurance Policy?
The amount admissible as a loan against the insurance policy is in the range of 70-90% of the surrender value of the policy.
How Can the Repayment of the Loan Against the LIC Policy Be Done?
Normally LIC offers relaxed payment options for a loan against its policy.The loan repayment could be done in the following ways.
- Pay interest and the principal in loan EMIs
- Pay only the interest regularly and pay principal in due course
- Pay the interest and regularly and adjust the outstanding loan amount(principal) against the maturity benefits.
However, when you avail of a loan from a bank, you would have to pay back the loan in regular EMIs.
Important Features and Benefits of Availing a Loan Against LIC Policy
There are some important features and benefits that you should keep in mind before availing a loan against a LIC policy are:
- The loan against a LIC policy comes at a cheaper rate than a personal loan (10% onwards) or a credit card interest rate (36-48%).
- Like a personal loan, loan availed against a LIC policy can be used for any purpose according to your needs
- Availing a loan against a LIC/Insurance policy would not require a credit score. This can come across as one of the greatest advantages for an individual with a bad credit score
- The life cover on the policy will continue in spite of availing the loan. In case of death of the insured (borrower) then the death benefit will be paid after deducting the quantum of the outstanding loan.
- The processing time for a loan against an insurance policy is minimal especially when it obtained from the insurer.
- Due to various kinds of repayment available, a lesser financial burden is created on availing this loan
- A loan can be availed only after the policy accumulates a certain surrender value, which means during the initial years of the policy it would be difficult to avail a loan against the policy.
While availing of a loan against a LIC/Insurance policy seems easier and is also available at lower interest rates, you should avail of this loan with caution. Like any other loan, avail this loan only if you are sure of paying it back on time. Or else the beneficiaries of your policy may end up losing the benefit in case of any eventuality.
