Use these loans to meet emergency needs, and not to fund holidays or luxury purchases.
Insurance companies are increasingly offering secured loans to policyholders using their insurance policies as collateral.
According to media reports, the loan outstanding in this segment stood at Rs 1.35 trillion at the end of 2024-2025.
The Life Insurance Corporation is the largest player in this segment.
Many private insurers have recorded over 25 per cent year-on-year growth on their smaller base.
Meet liquidity needs
A loan against insurance policy allows customers to meet their temporary funding requirements.
"Meanwhile, the life insurance policy continues to secure the borrower's financial future by providing protection," says Rajeev Chugh, chief financial officer, Generali Central Life Insurance.
Borrowers with zero or poor credit history may opt for it.
"Those who find it difficult to access credit due to their poor credit profile or some other reason find this product useful," says Santosh Agarwal, CEO, Paisabazaar.
Loan against policy is cheaper than unsecured credit, like a personal loan.
Chugh highlights that repayment of interest and principal is flexible.
Borrowers can use a regular EMI structure, or only pay interest at regular intervals and repay the principal at the end of the tenure.
"Borrowers do not need to break a fixed deposit or surrender a policy. They also do not have to come up with additional collateral. They only take a loan against what they already have," says Adhil Shetty, CEO, BankBazaar.com.
Disbursement is quick since no fresh assessment of collateral is required.
Default can cause loss of coverage
Not all insurance policies qualify for this loan.
"Borrowers cannot get a loan against unit-linked insurance plans and term plans," says Shetty.
Default has severe consequences.
"If the borrower defaults, unpaid loan and accumulated interest are adjusted against the policy's surrender or maturity value, reducing the payout to the policyholder or nominee," says Agarwal.
"Once the surrender value of the reduced paid-up life insurance policy goes below the loan amount and accumulated unpaid interest, the policy gets foreclosed," says Chugh.
This results in loss of coverage and policy benefits.
Compare terms
Borrowers must confirm whether their policy is eligible for this loan.
"Check if the policy's accumulated surrender value is meaningful," says Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors.
Repayment terms must match the borrower's cash flows.
Dhawan advises comparing the loan-to-value ratio (LTV), interest rate, processing fees, administrative charges, and foreclosure terms of various lenders.
Avoid overleverage
Borrowers should avoid taking the maximum loan amount they are eligible for if it is not needed.
"Doing so raises interest costs and may encourage unnecessary spending. Use these loans to meet emergency needs, and not to fund holidays or luxury purchases," says Dhawan.
Borrowers must evaluate their repayment capability.
"Those who are not sure about their repayment capacity should consider liquidating the policy instead of taking a loan," says Shetty.
Premium payments must continue during the loan tenure, so that the policy does not lapse.
Loan repayment should not be delayed as it increases the interest burden.
Borrowers must not take this loan without evaluating alternatives such as gold loans and loans against FDs.
"If you have gold or FDs that can be offered as collateral, check which option is the cheapest," says Shetty.
Agarwal points out that a topup loan can be a good choice for existing home loan borrowers.
Dhawan adds that a loan against FD is usually priced just one to two percentage points above the FD rate, and hence may be cheaper than a loan against insurance policy.
This loan is offered as an overdraft facility, so interest only has to be paid on the drawn amount.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff
