Quick Overview
If you’ve ever bought a term insurance plan, you may have wondered whether it can double up as an emergency source of funds. After all, life insurance feels like a financial safety net. So why shouldn’t it offer liquidity?
At Ditto, our advisors often hear this question, and most policyholders are unsure which insurance plans actually allow loans.
To clear the confusion, we reviewed insurer brochures, lender practices, and guidelines issued by the Insurance Regulatory and Development Authority of India. This guide explains why loans against term insurance don’t work, which policies do qualify, and what you should realistically expect.
How Does a Loan Against a Term Life Insurance Policy Work?
A loan against a term life insurance policy does not work because term plans do not have usable monetary value while you are alive. They pay out only on death during the policy term, so lenders have no collateral to recover money from.
In India, insurer-backed policy loans are linked to non-linked savings policies that build surrender value, and most term plans explicitly disallow loans even if an exit value exists.
In practice, banks also do not lend against term plans. At most, they may ask for a policy assignment so the death claim can be used to repay an existing loan if the borrower passes away. However, this is not a loan against the policy.
Savings-oriented life insurance policies, such as endowment plans, money-back plans, and certain whole-life policies, work differently because they build surrender value that can actually be used for lending.
Benefits of Taking a Loan Against a Life Insurance Policy
If you hold a life insurance policy that qualifies for a loan, borrowing against it can offer several practical advantages.
- No Credit Checks Required: Since the loan is secured against your life insurance policy, insurers usually do not check your credit score or income details.
- Lower Interest Rates: Policy loans typically carry interest rates of around 9-10%, which is lower than most personal loans.
- Faster Processing: The application process involves minimal paperwork, and loan disbursal often happens within a few working days.
- Policy Remains Active: You do not need to surrender or cancel your policy. Your life cover continues as long as the loan interest is paid on time.
- Flexible Repayment Structure: Many insurers allow you to service only the interest during the loan period instead of paying fixed monthly EMIs.
How to Apply for a Loan Against a Term Life Insurance Policy?
Step 1: Confirm the Policy’s Eligibility
Check whether your life insurance policy has acquired surrender value and qualifies for a loan.
Step 2: Download the Loan Application Form
Access the form from the insurer’s website or collect it from a branch.
Step 3: Decide the Loan Amount
Choose a specific amount or opt for the maximum available against your policy.
Step 4: Assign the Policy as Collateral
Temporarily assign the policy to the insurer until the loan is repaid.
Step 5: Submit the Required Documents
After verification, the loan amount is credited to your bank account.
Note: Processing usually takes a few working days, depending on the insurer’s internal timelines.
Documents Required to Apply for a Loan Against a Term Life Insurance Policy Online
Applying for a loan against a life insurance policy requires only a basic set of documents.
- A duly filled loan application form
- The original policy bond is proof of ownership
- Identity and address proof for KYC verification
- A cancelled cheque or bank account details for disbursement
- A policy assignment form to mark the policy as collateral
Things to Consider About Loans Against Life Insurance
Loan Limit
The loan amount is usually capped at 80 to 90 % of the policy’s surrender value, depending on the insurer’s rules.
Interest Accrual
If interest is not paid regularly, it gets added to the outstanding loan amount, which increases the total liability over time.
Claim Adjustment
In case of the policyholder’s death, any outstanding loan and interest are deducted from the final claim payout before it is paid to the nominee.
Risk of Policy Lapse
If the loan balance and accumulated interest become too high and exceed the policy’s value, the policy may lapse.
ULIPs Work Differently
Life insurers do not offer internal loan facilities on ULIPs because they are market-linked products and their value fluctuates based on fund performance. If available, these loans are usually provided by banks or NBFCs under different terms.
Loan from Insurer vs Bank or NBFC
Note: If your policy qualifies, a loan from the insurer is usually simpler and more efficient. Loans from banks or NBFCs are an option but often involve additional conditions and administrative steps.
Why Choose Ditto for Term Insurance?
At Ditto, we’ve assisted over 8,00,000 customers with choosing the right insurance policy. Why customers like Aaron below love us:
- No Spam & No Salesmen
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Ditto’s Take on Loan Against Term Insurance
If your goal is emergency liquidity, term insurance should never be part of that plan. Term policies are designed purely for protection and do not build any usable value during your lifetime.
Savings-oriented life insurance policies work very differently. If you already hold one, a policy loan can be a faster and more affordable alternative to personal loans, with lower interest rates and simpler documentation. These policies can allow you to borrow up to 90% of the value accumulated over time.
The key is understanding what kind of policy you own. Trying to raise funds against a term plan only leads to wasted effort, while the right type of life insurance policy can provide meaningful liquidity when needed.
Frequently Asked Questions
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