Need a quick loan at reasonable rates? Instead of opting for a personal loan, as most people do, you can consider pledging your life insurance policy and taking a loan against it.

Choose from the options

There are many entities who are willing to give you a loan against an insurance policy. The insurance company, be it a public or private, from where you have taken the policy may offer you a loan against the policy. Life Insurance Corporation of India (LIC) offers this facility. The other institutions that provide loan against insurance include Non-Banking Financial Companies (NBFCs) like Bajaj Finserv, Aditya Birla Financial Services etc and banks like HDFC Bank, ICICI bank etc.

Eligibility and loan amount

But not all insurance policies can fetch you a loan. For the list of life insurance policies that can get you a loan, check with the lenders. HDFC Bank has a list of eligible policies on its website.

Insurers mostly offer a certain percentage of the surrender value of the policy as the loan amount. For instance, LIC offers loan upto 90 per cent of the surrender value at an interest rate of 9 per cent, which charged half yearly. A minimum of three to five years of premium must have been paid for you to take a loan. Banks like ICICI Bank extend loans ranging from a minimum of ₹50,000 to ₹5 crore. The interest rate ranges from 10.2 per cent to 13 per cent.

Pros and cons

The key benefit of taking a loan against your policy, as against taking a personal loan, is that the interest rates charged are far lower. ICICI bank for instance charges 11.99 to 20 per cent on its personal loans but only 10.2 to 13 per cent on loans against insurance.

When you take a loan against an insurance policy, there is no risk of margin calls because the value of the policy doesn’t change with the market. This is a major drawback in case of loans against shares or gold.

In terms of repayment, an option is given to either pay back the principal amount also along with the interest or only the interest amount. If you chose the latter then the flip side is that, in case of death during the loan term, the pending amount can be deducted from the claim amount by the lender, with the balance paid back to you.

Though taking a loan against insurance policy is a good option as it entails lower interest rates, this should not be the deciding factor in taking an insurance policy. A life insurance cover is intended to financially secure your dependents in the event of your death. By borrowing against it, you would be depriving them of this protection.

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