Loan against LIC policy: All you need to know about it

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LIC (Life Insurance Corporation of India) has a great outreach. It is one of the largest and oldest insurance companies in India. It not just provides a variety of different insurance plans but also offers LIC loan or loan on LIC policy. These loans are short term in nature, which generally are used to meet the immediate monetary crunch of the insurance policyholder. For instance, these loans can be utilized to meet education expenditures, travel expenditures, medical expenditures, and unexpected exigencies.

A LIC loan carries a specific stature in the market and is extremely simple to avail of. A loan on LIC policy is secured in nature, where the policy itself acts as a security or collateral. On loan default, the proceeds of the policy are taken up by the financial institution that lent the fund proceeds. The loan on LIC policy is risk-free for financial institutions. As it is a risk-free credit option, the disbursement is easy and quick.

Loan on LIC policy conditions

There are a few prerequisites to take up the loan on LIC policy. These are:

Loans can be taken up on policies where there are at least three premium payments.

       Loan value allowed is up to 90 percent of surrender value or 85 percent of paid-up policies.

       Few policies acquire the surrender value after some years. In these cases, if the LIC policy is surrendered within the period, the insurer will pay nothing. Thus, in such cases, there is zero loan extension until this period lapses.

       In the case of LIC loan, policy becomes the security or collateral.

       In such a loan, generally, interest on the loan is paid on a half-yearly basis. The interest gets charged for a minimum of 6 months period.

       Lenders can ask for repayment along with interest by providing them a notice period of three months.

       In the event of any default, the lender forecloses the insurance and use this proceeds to settle down the loan.

       Grace period extended to the borrower is thirty days from the due date; if the loan borrower fails to meet the loan within thirty days from the payment date, the lender can close the loan along with the policy.

       In case of the borrower’s death, the insurer can settle the claim with the nominee after lowering the loan amount outstanding from the policy.

Loan on LIC policy process

Listed below is how the online loan approval is done along with the disbursal process:

       Loan gets authenticated by the OTP sent to the mobile number of the applicant.

       Loan amount is credited through NEFT to the policyholder’s bank account.

       Before that loan application is filled and submitted to the LIC branch office along with a sign as well as assignment of the underlying LIC policy.

       All the original policy documents and bonds are pledged with the insurer.

       NEFT is just the only mode for fund transfer, and thus if account details are not uploaded, the applicant might mention details when submitting the application form.

       Loan proceeds are approved based upon your eligibility in respect to the LIC policy held by you. All rules are mentioned on the terms and conditions, which you must sign with caution.

       Loan value might vary from what gets reflected in the calculator, owing to premium payment and change in the rate of interest.

Rate of interest applicable on loan against LIC policy

The minimum period for which these loans are 6 months, as mentioned above. A loan can be extended up to the insurance plan’s maturity date. While many of the lenders permit loan pre-closure, if the loan gets prepaid within 6 months threshold period, there are zero requirements to pay an interest of up to 6 months in the form of a penalty. Dissimilar to other loans where the borrower mandatorily requires repaying both the interest and principal, such loans permit the borrower to either repay both the interest and principal together or repay just the interest first, and the principal can be repaid on maturity. There are zero requirements to follow any stringent schedule like EMIs (equated monthly instalments. Borrowers are permitted to repay only the interest for a few months, and when they get surplus funds, they may repay excess loan components, which can be adjusted against the principal constituent. Thus, with respect to repayment, such loans provide excess flexibility.

The applicable interest rate is according to the lender’s decision. The lender determines the rate of interest from time to time by aligning it with the market rate. As it is a secured loan option, the rate of interest is likely to be on the lower side than unsecured loan options, which fall within the category of high risk for lenders.

Loan on LIC policy eligibility criteria

There are a few key eligibility criteria you must know before availing loan on LIC policy, they are:

       Applicants must be 18 years or more.

       Available just to the Indian residents.

       Must own the LIC policy, which generates cash or surrender value.

       Premium for three years must be paid against the LIC policy.

       Loan value must not surpass 90 percent surrender value. In the case of paid-up LIC policy, the maximum value of a loan is 85 percent.

LIC policies eligible for a loan

A loan is not provided on all the LIC policies. Loans are provided against the whole life endowment plans, ULIPs or unit-linked plans, income plans that come with a surrender value. A loan is not at all available against term policies. Plans which provide the loan option are Jeevan Rakshak, New Jeevan Anand, any endowment plan, Jeevan Lakshya, Jeevan Labh, Jeevan Pragati etc. Note that list might change based on the launch or closure of new LIC policies.

Crucial features of loan on LIC policy

       Such loans are advanced against surrender policy value.

       Loan will be lower than the surrender value.

       Security for such loan types is LIC policy for which a minimum of 3 premiums must be paid.

       Repayment loan schedule is flexible in nature

  • In case of default, the insurer may foreclose the loan.