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About Loan Against LIC policy

Life Insurance Corporation of India (LIC) has a massive outreach, it is the oldest and the largest insurance company in India. It not only offers variety of insurance plans, it provides loans against its insurance policies as well. The loan is extended by LIC, banks and other NBFCs (Non-banking financial corporation). These are short-term loans which are typically used to cater to expenses of immediate nature. For example, these loans could be used for education expenses, medical expenses, travel expenses or vacation, unexpected emergencies etc.

LIC insurance policies carry a certain stature in the market, it is extremely easy to avail a loan against an LIC policy. Loan against LIC policy is a secured loan, where the policy itself becomes the collateral. On default of the loan, the proceed of the LIC policy will go to the financial institution which has lent the money. These types of loans are risk-free for the financial institution. Since this is a risk free loan, the disbursement is quick and easy.

Loan Against LIC Policy
Loan Against LIC Policy

Conditions for taking Loan Against LIC Policy

There are some pre-requisites to avail loan against LIC policy. They are -

  • Loan can be availed on policies where there have been atleast 3 premium payments
  • Loan value can be up to 90% surrender value or 85% of paid up policies
  • Some policies acquire surrender value after few years, in such case if the policy is surrendered within this period, nothing is payable by the insurer. Hence, in such cases, there is no loan extended until such period lapses
  • Policy will be the collateral in the case of such loans
  • In this type of loan, typically interest (on loan) is paid on a half-yearly basis. Interest will be charged for a minimum period of 6 months
  • Lender can ask for loan repayment along with interest by giving a notice of 3 months
  • Incase of default, lender will foreclose the policy and use the proceeds to settle the loan
  • The grace period extended to borrowers is 30 days from due date, if the borrower fails to settle the loan within 30 days from the due date, lender (including LIC) can foreclose the policy
  • In the unfortunate death of the borrower, the insurer will settle the claim (with the nominee) after reducing the outstanding loan amount

Process of online loan approval and disbursal

Below, we have mentioned the online loan approval and disbursal method followed by lenders while extending loans against LIC policies –

  • Loan will be authenticated by OTP sent to the registered mobile number of the prospective borrower
  • Loan will be credited via NEFT to the bank account of the policy holder
  • Loan application must be filled and submitted at LIC branch office with signature and assignment of underlying LIC policy in favor of LIC
  • Original policy bond will be pledged with the insurer
  • NEFT is the only mode for fund transfer, hence, if details are not already uploaded, the borrower may mention details in the application form
  • Loan is approved based on the eligibility pertaining to the policy held – the rules are mentioned under the plan
  • Loan value may differ from what is reflected in the loan calculator, due to payment of premium, change in interest rate etc.

Interest rate applicable on Loans Against LIC Policy

The minimum period for which such loans are extended is 6 months. The loan can be extended up to the maturity of the insurance plan. While most lenders allow pre-closure of the loan, if the loan is closed within the minimum 6-month threshold, there is a need to pay interest up to 6 months as penalty. Unlike other loans where the borrower has to mandatorily pay both principal and interest, these loans allow the borrower to either pay both principal and interest or pay only the interest and the principal will be set off against the maturity value. There is no need to follow a stringent schedule such as the equated monthly installment. The borrower is allowed to pay just the interest for few months and when there is excess cash, the same can be paid to adjust against the principal amount. These types of loan offer ample flexibility with respect to repayment.

The interest rate applicable is as per the lender’s prerogative. The lender declares the interest rate from time to time by aligning them with the market interest rate cycle. Since, this is a secured loan, the interest rate is likely to be lower than that of unsecured loans which fall within the high-risk category for the lender.

Eligibility criteria for availing Loan Against LIC Policy

There are some key eligibility criteria to avail loan against LIC policy, the same are as stated below.

  • Borrower should be of 18 years or above
  • Available only for Indian residents
  • Should own an LIC policy which yields surrender or cash value
  • Premiums for 3 years should have been paid against the policy (thereby creating surrender value for the policy)
  • Loan value cannot exceed 90% of surrender value; incase of paid up policies the maximum loan value can be 85%

LIC policies which are eligible for the loan

Loans are not extended against all LIC policies. Loans are available against whole life endowment plans, income plans, endowment plans and unit linked plans that have surrender value. Loan is not available against term plans. The plans which offer loan are – New Jeevan Anand, Jeevan Rakshak, Jeevan Lakshya, Endowment plan, Jeevan Pragati, Jeevan Labh etc. The list may change based on closure or launch of new policies by LIC.

Features and benefits of Loan Against LIC Policy

The key features and benefits of loan against LIC policy are as stated below –

  • These loans are advanced against the surrender value of the policy
  • Loan will always be lower than the surrender value
  • Collateral for these types of loan is LIC policy for which atleast 3 premiums have been paid
  • Flexibility in repayment of loan
  • In the event of default, the lender can choose to either add the amount due to the outstanding loan or foreclose the policy
  • If the surrender value falls below the outstanding loan amount (typically can occur in unit linked endowment plans where markets play a pre-dominant role in fund value or surrender value), lender may foreclose the policy

Documents required to avail Loan Against LIC Policy

This type of loan can be availed with minimal documentation. Since these loans are secure, the loans are approved and disbursed quickly.

  • Filled up application form
  • Original policy document
  • Proof or residence, identity proof and income proof
  • NEFT details for loan disbursement

Advantages of Loan Against LIC Policy

There are few advantages of availing loan against LIC policy –

  • Flexible payment schedule :
  • Most other loans offered follow the equated monthly installment schedule. Loan against LIC policy have flexibility in repayment schedule, the borrower can choose to pay only interest or both principal and interest or pay uneven installment.

  • Lower rate of interest :
  • Rate of interest against LIC policy is lower as compared to other types of loans. Since this is a short term loan and a secured loan, the interest rates are competent.

  • Quick and easy processing :
  • The loan disbursal is faster since it a loan with collateral. The processing for other types of loans are comparatively lengthy.

  • Loan value is dependent on surrender value of LIC policy :
  • The quantum of loan is dependent on surrender value of the policy held. The quantum of loan for unsecured loans is dependent on credit score and income level of the applicant.

Loan against LIC policy can be preferred over availing unsecured loan, since it offers lower interest rate and flexible payment schedule.

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