Loan Against LIC Policy: Advantages and Disadvantages

A Life Insurance Corporation (LIC) policy is not only a tool for providing financial security to your loved ones in case of unfortunate events but also acts as a financial resource during emergencies. One such advantage is that you can avail of a loan against your LIC policy. This loan allows policyholders to borrow funds by pledging their policy as collateral, offering a convenient way to access funds without breaking their investment.

This article will help you understand the advantages and disadvantages of taking a loan against your LIC policy, explaining how it works and whether it’s a suitable option for your financial needs.

Introduction to Loan Against LIC Policy

A loan against an LIC policy is a secured loan where the insurance policyholder uses their LIC policy as collateral to borrow money. This loan is available for traditional life insurance policies with a surrender value, such as endowment plans or whole-life policies. Term insurance policies are generally not eligible for such loans.

The loan amount typically depends on the surrender value of the policy, and the borrower must continue paying the premiums to keep the policy active during the loan tenure. Since the loan is secured by the policy, lenders offer lower interest rates compared to unsecured loans.

Let’s now explore the advantages and disadvantages of taking a loan against your LIC policy.

Advantages of Loan Against LIC Policy

1. Easy Access to Funds

A major advantage of taking a loan against your LIC policy is the quick and easy access to funds. Since the loan is secured against your life insurance policy, the process is relatively simple and requires minimal documentation. Once your application is submitted, the loan is approved quickly, making it a suitable option for emergency financial needs.

2. Lower Interest Rates

Loans against LIC policies typically come with lower interest rates compared to unsecured loans like personal loans or credit card debt. The interest rates are generally in the range of 9-10%, depending on the policy and lender. This makes it a cost-effective option for borrowing funds, especially when compared to high-interest credit cards or personal loans.

3. No Credit Check Required

Since the LIC policy acts as collateral for the loan, lenders do not usually perform a credit check. This means that even if you have a low credit score, you can still avail of this loan. The focus is on the surrender value of the policy rather than the borrower’s creditworthiness, which makes it easier for individuals with poor credit histories to access funds.

4. Retain Policy Benefits

When you take a loan against your LIC policy, the policy remains active, and you continue to enjoy the life cover provided by the policy. This means that in case of the policyholder’s unfortunate death during the loan tenure, the insurer will pay the death benefit to the nominee after adjusting the outstanding loan amount. The policy benefits remain intact as long as the premiums are paid on time.

5. Flexible Repayment Options

A loan against an LIC policy offers flexible repayment options. You can repay the loan as per your convenience, either through regular EMIs or by paying lump sums. In some cases, there are no strict timelines for repayment, as the loan can be repaid anytime during the policy term, as long as the policy remains active.

6. No Impact on Credit Score

Since the loan is secured by your LIC policy and does not require a credit check, taking this loan does not impact your credit score. Unlike personal loans or credit card loans, which can affect your credit rating based on your repayment history, loans against LIC policies are not reported to credit bureaus, making it a safe borrowing option in terms of credit score.

Disadvantages of Loan Against LIC Policy

1. Limited Loan Amount

One of the key disadvantages of a loan against an LIC policy is that the loan amount is limited to a percentage of the policy’s surrender value, typically ranging from 80% to 90%. If your policy has a low surrender value, the loan amount may not be sufficient to meet large financial needs. This makes it less suitable for individuals seeking a high loan amount.

2. Policy Lapse Risk

If you fail to repay the loan or the interest on time, there is a risk that the LIC policy could lapse. A policy lapse means losing both the life insurance cover and the maturity benefits associated with the policy. This could lead to significant financial loss, especially if the policy was meant to provide long-term security for your family.

3. Accumulated Interest

Although the interest rates are lower, the interest on a loan against an LIC policy continues to accumulate over time. If you do not make regular repayments, the interest amount can build up, increasing the overall repayment burden. This can be a disadvantage if the loan tenure is long and you do not manage your repayments effectively.

4. Loss of Maturity Benefits

In case you are unable to repay the loan or the accumulated interest by the time the policy matures, the outstanding amount will be deducted from the maturity benefits. This means that the final payout you receive at the end of the policy term will be reduced by the loan amount, affecting your long-term financial goals.

5. Limited to Traditional Policies

Not all LIC policies are eligible for loans. Loans can only be taken against traditional policies like endowment plans, money-back policies, and whole-life insurance policies. Term insurance plans do not have a surrender value, which means you cannot take a loan against them. This limitation reduces the flexibility of using this loan option for certain policyholders.

6. Impact on Policy Returns

While you continue to hold the LIC policy and enjoy its benefits, taking a loan against the policy may affect the returns. For example, if you fail to repay the loan and the interest on time, the lender may deduct the outstanding amount from the maturity proceeds. This could significantly reduce the final returns you were expecting from the policy.

Conclusion

A loan against an LIC policy is a useful financial tool that allows you to access funds without breaking your investment or selling other assets. It offers several advantages, such as lower interest rates, easy access to funds, and continued policy benefits. However, it also comes with certain risks, such as the potential for a policy lapse, limited loan amounts, and the accumulation of interest over time.

Before opting for a loan against your LIC policy, it is important to carefully assess your financial needs and repayment capacity. While it can be a great option for short-term or emergency financial needs, proper planning is essential to ensure that you don’t risk losing your policy or reducing your maturity benefits. Consulting with a financial advisor can help you make an informed decision that aligns with your long-term financial goals.