Life Insurance

Loan Against The Insurance Policy

Similar to a loan against property, a loan against an insurance policy is a type of loan against security where you can pledge some sort of financial asset, in this example, your insurance policy, in…

Similar to a loan against property, a loan against an insurance policy is a type of loan against security where you can pledge some sort of financial asset, in this example, your insurance policy, in exchange for a loan from the lender. People are increasingly choosing loans against life insurance plans since they have lower interest rates than personal loans.

What is a Loan Against Insurance Policy?

A loan secured by an insurance policy, commonly called pledging, is quite popular in foreign countries. The insurance companies and other financial institutions issue loans against securities, which is advantageous for those looking for loans because no additional assets are required. Therefore, you can borrow money from your life insurance policy to take out personal loans.

But, not all insurance policies are eligible for a loan. It’s crucial to understand which life insurance products can help you avail of this benefit.

Insurance Policies Eligible for a Loan

Not all types of life insurance policies are eligible for a loan. Verifying your life insurance company is best before purchasing a plan. Specific policies, such as whole life, money-back, savings, and endowment plans, offer the ability to borrow money against a life insurance policy. Although, unit-linked plans and term insurance policies cannot be used as collateral.

Benefits of a Loan Against an Insurance Policy

A loan against the insurance policy has many benefits, so let us look at them.

  • There is no need for additional security or assets because the insurance policy itself serves as a guarantee.
  • This loan often has a lower interest rate than a personal loan.
  • Due to the low amount of paperwork needed for this sort of loan, you can quickly get a loan against the insurance policy.
  • Even if the policyholder dies while the loan is still in effect, the outstanding loan payback amount is subtracted from the policy's cash value, and the leftover sum is paid to the nominee.
  • You can apply for a loan online, and the process is simple and hassle-free.

Steps to apply for a loan against an insurance policy

If you are looking to apply for a loan against an insurance policy, you must follow these steps to have a hassle-free process.

Step 1: To determine whether your insurance policy qualifies for a loan against it, you must first check before applying for one. In addition, there are additional considerations like age, legal documentation, credit score, etc.

Step 2: You could get a legitimate life insurance policy if you don't already have one to borrow money against. A loan or credit may be a beneficial tool in an emergency.

Step 3: Finding an insurance company prepared to grant you a loan against a life insurance policy is necessary now that you have the policy that allows you to take out a loan against it. Make sure you conduct thorough research and look for the best.

Step 4: You can get the deal done after following the above steps. You can also get a loan against a life insurance plan online.

Key Things to Know Before You Apply for a Loan

When applying for a loan against a life insurance policy, there are some key things that you need to take into account. Take a look at them:

  • Rate of Interest: The interest rate charged for a loan against an insurance policy depends on the interest rate in effect at the time the policy was purchased. However, the interest rate for loans secured by insurance policies is often lower than that of conventional loans. However, it is advisable to speak with your loan provider to understand better the interest rate for loans secured by insurance policies.
  • Eligibility: It's essential to verify with the life insurance company whether your policy is eligible for a loan or not. If not, buying a life insurance policy that can also help you get a loan is recommended.
  • Surrender Value: If you have been paying your payments on time for three years after purchasing the policy, your life insurance coverage will have a surrender value. Depending on your insurer, the time frame for collecting a surrender value may vary. But you can't get a loan if your policy has no surrender value.
  • Loan Amount: You must check with your insurer to see whether you qualify for a loan secured by an insurance policy. Compared to traditional life insurance plans with guaranteed returns, the loan amount might range from 85 to 90 per cent of the surrender value.
  • Repayment: A loan secured by a life insurance policy typically has a six-month repayment period. However, depending on the insurance policy, the terms and conditions of repaying your loan may change.

What if I Fail to Pay My Loan

If you don't repay the loan you took against your life insurance policy, interest will be added to the outstanding total. Also, the insurance policy may expire if the amount borrowed for the loan against the insurance policy is more than the insurance policy's cash value. The insurer will then have the option to cancel your insurance policy and deduct the loan balance and interest from the surrender value of your policy. So, it is advisable to pay the loan amount.

Disadvantages of Loan Against Insurance Policy

One should exercise caution while taking out a loan against a life insurance policy because the policy is meant to safeguard the policyholder's family in the event of the policyholder's passing. If the interest is to be repaid and the policyholder passes away within the loan period, the outstanding loan balance will be deducted from the claim settlement. The nominee will only receive the remaining sum of money. So, it is important to make sure that to choose this option wisely. Avoid taking out an insurance loan during the first few years of the policy since the amount of the loan that would be available to you would be less.

Documents Required to Take a Loan

You must apply for a loan against insurance and the original insurance policy paperwork to qualify for this loan. A copy of a cancelled check and a payment receipt for the loan amount must also be included.

A deed of assignment that assigns the policy's benefits to the lender for the duration of the loan must also be signed by the policyholder. Until the debt is repaid, the insurance policy will serve as collateral.


Remember that you should turn to this line of action only in cases of extreme financial need. The level of protection you have throughout the repayment period only decreases if you take out a loan for non-essential expenses. Also, it is important to repay the loan in a timely manner as the interest keeps getting added.


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