Life Insurance Corporation (LIC) allows its holders to avail a loan against LIC policy. It makes sense to get an LIC loan if you need immediate liquidity to pay off debt as compared to credit card debt or personal loans. One can get a loan on their LIC policy as long as it is an endowment policy.
Conditions For Taking A Loan Against LIC Policy
To avail a loan against an LIC policy, a policyholder must consider the following:
- Make payments on the premium for at least 3 years.
- Make a loan application for an amount of 90% or less of the surrender value. Applications for paid-up policies can only avail a maximum loan amount of 85% of the surrender value.
- Check loan eligibility in the LIC policy. For example, endowment policies are eligible for a loan but term life insurance policies are not.
- The original policy bond is surrendered to LIC as a security against the loan.
- Other financial institutions provide loans against LIC policies for policyholders too. The value of the loan is based on the ‘LIC quote’ placed on the loan by LIC. Other institutions generally charge a higher rate of interest and provide a lesser loan amount as compared to LIC.
Terms on Loan Against LIC Policy
- The minimum period one can take out a loan for is 6 months. If a loan is repaid within the first 6 months, 6 months interest will be charged.
- A loan taken on an LIC policy can be repaid in full along with interest. The other option would be to make interest payments regularly and allow the loan amount to be deducted when making payment claims. Interest is paid half-yearly and LIC offers flexibility in terms of repayment options.
- If any interest is overdue for more than 30 days, then LIC can foreclose a policy and settle the balance amount.
- A policyholder can take out further loans on existing policies. This is permitted provided earlier outstanding amounts on previous loans are deducted. A second loan can be taken on an existing policy provided the entire combined loan amount is 90% or less of the surrender value.
- The loan eligibility amount will be less during the initial years of an LIC policy.
Is A Loan Against LIC Policy Right For You?
Based on the purpose for which one needs to take a loan, one can evaluate if LIC policy is right compared to other options. At the time of writing this article, the loan against LIC policy rates are at ~10.5%. For someone with a good credit score who wants to take a car or home loan, there are much better options starting at 8%. On the other hand, personal loans start at 11% even for those with good credit score. Based on one’s need for the loan and existing options in the market, one can evaluate whether an LIC policy is right for them or not.