If you've ever bought a term insurance plan, you may have wondered: Can I use this policy to borrow money in an emergency? After all, life insurance feels like a safety net, so why shouldn’t it offer liquidity?

At Ditto, our advisors handle hundreds of queries from people trying to unlock cash using their insurance plans. And through these conversations, one thing is clear: most policyholders don’t know which insurance plans actually qualify for a loan and which don’t.

So we went through IRDAI regulations, product brochures, and real-world lender policies to give you a complete, no-jargon guide. By the end of this article, you’ll know why term plans don’t work for loans, which life insurance plans do, how much you can borrow, and what interest rates to expect alongside real examples using popular life insurance plans.

Term-Insurance Loans: Can you borrow against a term plan?

No, you cannot borrow money against a term insurance policy because it has no collateral value while you're alive. Term plans are pure protection products that only pay out in the event of death.

Imagine a bank gives you a ₹10 lakh loan against a ₹1 crore term policy. If you survive the policy term, the insurer pays nothing. And if you default on the loan, the bank can’t recover the money from the policy because no payout is triggered. In short, the policy holds no monetary value during your lifetime, which makes it unfit as security for a loan.

However, you can borrow money against certain life insurance products.

Which Life-Insurance Policies Qualify for a Loan?

We asked our advisors to review IRDAI’s Master Circular on Life Insurance Products to see which policies are eligible for loans. Here’s what it says:

“All non-linked savings products offering surrender value shall have the facility of policy loan based on the eligible surrender value.”

Let’s break that down:

    • Non-linked savings products are traditional life insurance plans like endowment or money-back policies. In these plans, part of your premium goes towards a life cover, while the rest is invested to build a savings component that earns steady returns over time.  However these returns are not linked to the stock or bond markets. This stability makes them safer as collateral, unlike market-linked products (like ULIPs), where the value can fluctuate.
    • Surrender value is the amount your policy has built up over time. It’s the guaranteed sum you’d receive if you cancel the policy today. 

Bottom line: Any life insurance policy that combines life cover with a savings component, builds up a surrender value over time, and is not linked to market returns, can be used as collateral for a loan.

Step-by-Step Guide — How to Borrow Against Your Life Insurance Policy

    1. Check if your policy qualifies
      You can only borrow against savings-oriented plans (like endowment or money-back) that have acquired surrender value, typically after 2–3 years of premium payments.
    2. Download the loan form from your insurer’s website
      Look for the "Loan Against Policy" section, or visit a branch to get the form. Fill in basic details like policy number, contact info, loan amount (or select "maximum available"), and payout mode (cheque, NEFT, ECS).
    3. Attach required documents
      Include your original policy bond, KYC proofs (ID + address), and a cancelled cheque if you’ve chosen an electronic payout.
    4. Sign the assignment clause
      This legally assigns the policy as collateral to the insurer until the loan is repaid. Without this, the loan won’t be processed.
    5. Submit the form and documents
      Submit everything at your insurer’s branch or through your agent. 

And with this, your loan should be processed in a few days.

Insurer vs Bank: Where Should You Take the Loan?

It’s not mandatory to borrow from your insurance company. Many banks and NBFCs also offer loans against life insurance policies, especially if the policy has a decent surrender value. However, borrowing from a bank may not always make sense, since you will likely have to deal with more paperwork + a lower loan amount.
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How Much Can You Borrow against a Life Insurance Policy? 

The maximum amount you can borrow depends on two things:

    1. The surrender value your policy has built up over time
    2. The loan-to-value (LTV) ratio allowed by the insurer or bank (typically 80–90% of the surrender value). For example, if your policy has a surrender value of ₹5 lakh, you can borrow up to ₹4-4.5 lakh, depending on the lender.

To make this easier to understand, we asked Ditto advisor Vishakha to walk us through an example using LIC’s New Money Back Plan (20 Years). Here's how it plays out:

Let’s assume:

- You bought a policy with a Basic Sum Assured of ₹10 lakh

- You're 30 years old when you buy the policy

- You’ve been paying premiums of roughly ₹77,500 per year

- You've completed 10 years of payments (i.e. paid ₹7.75 lakh total)

Step 1: Calculate the surrender value

In your policy copy, you will find a table illustrating the Guaranteed Surrender Value for each year. For the LIC policy that we are evaluating, the Guaranteed Surrender Value is 57.5% if you’ve paid your premiums for 10 years.

So, your surrender value is 57.5% of ₹7.75 lakh = ₹4.45 lakh

Step 2: Estimate how much you can borrow

LIC, in its brochure notes that you can borrow up to 90% of the surrender value if the policy is in force. Meaning you can borrow up to ₹4.0 lakh (90% of ₹4.45 lakh)

Final takeaway:

If you’ve held your policy long enough and built up value, you can unlock up to 90% of the surrender value without giving up your policy or going through credit checks. The longer you hold the policy (and the higher your premiums), the more you can borrow against it.

Interest Rate Charged on Loans Against a Life Insurance Policy

When you borrow against a life insurance policy, the interest rate is declared by the insurer and remains fixed for the entire loan term. However, this rate is revised periodically for new loans, based on market conditions.

To give you an example, our advisors reviewed LIC’s New Jeevan Anand Plan:

For loans sanctioned between 1st May 2024 and 30th April 2025, LIC has set the loan interest rate at 9.5% per annum.

In general, you can expect insurer-backed loan rates to fall between 9–10%. If you choose to borrow from a bank or NBFC instead, the rate may be slightly higher, typically in the 10–12% range

Loans against a ULIP?

Loan facilities are not available through insurers for ULIPs. Since ULIPs are market-linked, their surrender value can fluctuate based on fund performance making them unsuitable as collateral from the insurer’s standpoint. We also asked our advisors to review several ULIP brochures, and all of them explicitly exclude policy loans:

HDFC Life Click 2 Invest ULIP – “No policy loans are available for this product.” 

Kotak Platinum ULIP – “Loans are not available under this plan.”

Reliance Nippon Life Classic Plan II (ULIP) – “The loan facility is not available under the plan.”

However, this doesn’t mean you can’t borrow against a ULIP. Banks and NBFCs do offer loans using ULIPs as collateral. These loans are usually capped at 40–50% of the fund value and come with higher interest rates (10–12%) compared to traditional policy loans.

Bottom line: As of 2025, no life insurer in India offers internal loan facilities on ULIPs. If you want to borrow against a ULIP, your only option is through a bank or NBFC.

Conclusion

Pure term insurance has zero collateral value and they cannot be used to borrow money. But traditional savings policies can unlock up to 90 % of their surrender value often at sub-10 % interest. And if you want to know what kind of insurance policies work best for you and your family’s needs, you can schedule a free call with our advisors.

 

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