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Insurance policies have always represented financial security and peace of mind, offering protection to families during life’s uncertainties. However, beyond their core purpose of providing life cover, traditional life insurance plans also hold another financial advantage — the ability to borrow against them. This facility, commonly referred to as loans against insurance policies, allows policyholders to access liquidity without surrendering their cover or compromising long-term goals.

In 2025, as awareness of financial planning grows and insurers adopt more digital-friendly processes, this borrowing option is becoming increasingly attractive. By understanding what is loan against insurance policies and applying smart strategies, individuals can enjoy both financial flexibility and continued life protection.

What is loan against insurance policies?

To understand the benefits, one must first know what is loan against insurance policies. It is a secured loan provided by an insurer or a bank against the surrender value of an existing life insurance policy. The surrender value represents the amount you would receive if you chose to discontinue the policy before maturity.

When you take such a loan, the insurer places a lien on the policy, using it as security until the loan is fully repaid. The amount sanctioned is typically between 70 and 90 per cent of the surrender value, depending on the insurer’s rules and the type of policy.

For instance, if your policy’s surrender value is Rs. 5 lakh, you can borrow around Rs. 3.5 lakh to Rs. 4.5 lakh. During this period, your insurance cover remains active, ensuring your family continues to be protected while you gain the advantage of short-term liquidity. This feature makes borrowing against insurance one of the most secure and convenient financial tools available.

Why loans against insurance policies are gaining popularity

Several factors explain why loans against insurance policies have become a preferred borrowing method for many policyholders:

Lower interest rates

Because the loan is backed by your policy’s cash value, the interest rate is significantly lower than unsecured loans or credit cards.

Quick disbursal

Insurers already possess your details and documents, leading to faster approval and processing.

No impact on credit score

Since this is a secured facility, your credit history plays a limited role in eligibility.

Continued life cover

The policy remains active while the loan is outstanding, offering ongoing protection for your dependants.

No restrictions on end use

The borrowed funds can be used for medical expenses, business, education, or any other legitimate need.

In short, this borrowing option combines convenience, affordability, and security — key reasons for its rising demand in 2025.

How the loan amount and interest are determined

The loan amount you are eligible for depends mainly on the type of insurance plan and its accumulated surrender value. Traditional plans such as whole-life, endowment, or money-back policies qualify, as they build a cash component over time. Pure term insurance plans, however, are not eligible since they do not generate any surrender value.

The interest rate for loans against insurance policies generally ranges between 8 and 12 per cent per annum. This rate is often reviewed periodically by insurers. Interest is charged only on the outstanding loan balance, which makes repayment easier to manage. Some insurers also allow flexible repayment options where you can pay the interest regularly and settle the principal later.

If you default on the interest for a prolonged period, the insurer may adjust the unpaid dues from the policy’s surrender value. Therefore, keeping up with repayments is vital to ensure your policy remains intact.

Advantages of taking a loan against your insurance policy

Choosing this type of loan can benefit you in several ways:

No need to liquidate investments

Your policy continues to earn bonuses or loyalty additions even while being used as collateral.

Lower borrowing cost

Interest rates are typically more competitive than those of personal loans.

Flexible repayment

You can repay at your convenience, often without strict EMIs or prepayment penalties.

Continued returns

Participating life insurance plans continue to accumulate value, even during the loan period.

Simple documentation

Since the insurer already holds your KYC records, the process is streamlined.

These benefits make loans against insurance policies an ideal choice for policyholders seeking quick, low-cost access to funds without jeopardising their coverage.

When should you consider a loan against your policy?

This borrowing option is particularly useful for individuals who need liquidity for short- or medium-term financial goals. You can consider it when:

• Facing a temporary financial emergency.
  

• Planning to fund education or healthcare expenses.
  

• Managing short-term business or investment opportunities.
  

• Looking to consolidate high-interest debt into a cheaper alternative.
  

In each scenario, borrowing against your policy ensures you meet immediate financial needs while keeping your insurance and long-term savings intact.

Tips to maximise benefits

To make the most of your loans against insurance policies, consider these practical tips:

• Borrow only what you need: While you may be eligible for a higher amount, borrowing conservatively ensures you maintain your policy’s future value.
  

• Understand the terms: Review the interest calculation, repayment flexibility, and potential penalties before signing.
  

• Maintain regular payments: Timely interest payments prevent any reduction in your policy’s surrender value.
  

• Avoid multiple loans: Repeated borrowing can erode your policy’s benefits and reduce its long-term worth.
  

• Track your policy’s performance: Monitor annual bonuses and surrender value growth to understand your available borrowing limit in the future.
  

Responsible use of this facility ensures you enjoy liquidity without compromising protection.

Risks and precautions

While the process is straightforward, borrowers should remain aware of certain risks. Failure to repay the loan or accumulated interest can cause the policy to lapse. In such cases, insurers may recover outstanding dues by reducing the policy’s benefits or maturity value.

Additionally, taking frequent loans may diminish your policy’s long-term bonus potential. Borrowers should also remember that the policy’s cash value fluctuates with time, and early borrowing in the policy term may offer limited funds due to a low surrender value.

Hence, it is best to use this option judiciously — primarily for short-term liquidity requirements, not for regular borrowing.

Tax considerations

The amount borrowed through loans against insurance policies is not considered taxable income, as it is a secured borrowing. However, the proceeds from your insurance policy, including maturity benefits and bonuses, remain subject to prevailing tax provisions under Section 10(10D) of the Income Tax Act.

If you use the loan for business or investment purposes, the interest paid may be claimed as a business expense. For personal borrowing, though, no tax deduction applies. Consulting a financial adviser can help you plan better from both a tax and investment perspective.

Conclusion

A loan against insurance policy is one of the most efficient ways to unlock liquidity while safeguarding your family’s financial future. By understanding what is loan against insurance policies and using the facility responsibly, you can balance immediate financial needs with long-term protection.

In 2025’s dynamic financial landscape, this tool offers a blend of stability and flexibility that few other credit products can match. As with all borrowing, discipline and planning are key — ensuring that your insurance continues to secure your future while supporting your present.