Know How to Get a Loan Against an LIC Policy

When you need funds, a life insurance policy can be a valuable asset beyond its primary purpose of providing financial protection to your loved ones. One of the lesser-known benefits of a life insurance policy is the ability to take out a loan against it. This can be a useful financial tool, but it's essential to understand how it works and what you need to consider. In this blog, we'll guide you through the process of getting a loan against your life insurance policy.

A Loan Against LIC policy allows you to borrow money by pledging your Life Insurance policy as collateral. The loan amount is a percentage of the policy's surrender value. This type of loan offers lower interest rates than personal loans and doesn't affect the policy's benefits, provided the loan and interest are repaid.

Yes, you can get a loan against certain insurance policies. Here are the key qualifying criteria:

• Type of Policy: The policy must be a permanent life insurance policy, such as whole, ULIP, or endowment insurance, that accumulates cash value. Term life insurance policies, which do not have a cash value component, do not qualify.
• Cash Value: The policy must have reached a specific cash value, which can take five to ten years of premium payments.
• Employment: The policyholder can be either salaried or self-employed.

You can take out a loan using your insurance policy as collateral. The minimum loan amount you can borrow starts at ₹2 lakh. Additionally, you can borrow up to 80% of the policy's surrender value (the amount you would receive if you decided to end the policy before its maturity).

Visit the nearest HDFC Bank and submit a filled-up Loan Against Security application form, the original policy document,  address, ID and income proof. The bank will inform you about loan eligibility, tenure, and interest. If you are an existing HDFC Bank customer, you will need minimal documentation, and the turnaround will be faster.

• Retention of Coverage: You retain your insurance coverage, ensuring continued protection for your family.
• Lower Interest Rates: Interest rates are usually lower than those for unsecured loans due to the policy collateral.
• Simple Application Process: The process is straightforward with minimal documentation required.
• Flexible Repayment: You can select a repayment period that suits your financial situation.

The Loan Against LIC policy is paid out as an overdraft into your HDFC Bank account. You can draw the funds from your account any time you want. The good thing about the loan is that you are liable to pay interest only on the amount you use and for the duration you use it. For example, if you have taken a loan of ₹2 lakh and draw just ₹20,000, you need to pay interest only on the drawn amount.

• Impact on Death Benefit: If you don't repay the loan, the outstanding balance plus interest will be deducted from your beneficiaries' death benefit. That means your loved ones could receive a reduced payout.
• Interest Rates and Fees: Be aware of the interest rates and any potential fees associated with the loan. Even though they are often lower than traditional loans, they still add to the overall cost.
• Policy Lapse Risk: If you fail to make repayments, your policy might lapse. This can result in a loss of coverage and potentially a tax liability on the borrowed amount.
• Impact on Cash Value: Outstanding loans reduce the cash value of your policy, which might affect your ability to take out future loans or make adjustments to your policy.

Looking to apply for a loan against shares? Click here

* Terms & conditions apply. Loan disbursal at the sole discretion of HDFC Bank Ltd

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.