- Many Indians hold LIC endowment or traditional investment-cum-protection policies
- LIC loans available on policies with surrender value after 3 years of full premium payment
- Loan amount can be up to 90% of the policy's surrender value with 9%-11% interest rate
Many Indians have at least one Life Insurance Corp. policy that was brought by their parents or relatives years ago. These policies are mostly designed as endowment plans and traditional investment-cum-protection plans.
These policies promise a lump-sum payout either upon the policyholder's death or upon surviving until the maturity date. A disciplined savings mechanism, LIC policies remain a preferred choice among conservative investors.
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Not many people know but one can also take a loan against most of their LIC policies. A loan against an active LIC policy is usually applicable if it has acquired a surrender value.
- Eligible Policies: Endowment, whole life, or money-back policies (pure term plans are not eligible).
- Lock-in Period: You must have paid full premiums for at least three consecutive years.
- Age Requirement: You must be at least 18 years old.
The key question remains whether a loan against your LIC policy can be more beneficial than a personal loan.
Loan On LIC Policy
You can typically get a loan of up to 90% of your LIC Policy Conditions surrender value for active (in-force) policies. Imagine a policy with a surrender value of Rs 5 lakh. This means loan value can be Rs 4.5 lakh.
If you take the loan directly from LIC, the interest rate can typically range from 9% to 11%. This means a loan taken for 5 years can become:
- Loan: Rs 4.5 lakh
- Interest: 9.5%
- Loan tenure: 5 years
- EMI: Rs 9,500
- Interest: Rs 1.17 lakh
- Total: Rs 5.67 lakh
READ | Loan Against LIC Policy: Eligibility, Documents, Features & How To Apply
Personal Loan
Personal loans in India usually start from around 10% and can go up to 20% or even higher depending on aspects like your credit score and repayment capacity.
Assuming if you secure a Rs 4.5 lakh loan at 12% for 5 years:
- EMI: Rs 10,000
- Time: 5 years
- Interest: Rs 1.50 lakh
- Total: Rs 6 lakh
Unless your personal loan interest rate is closer to the rate offered by LIC, it might be financially sensible to take a loan against your policy. This allows you to have more financial flexibility as you can secure the loan at a lower rate, saving more money over time.
However, if the two rates are closer to each other, you must consider the risks with pledging your policy. For instance, if the loan plus accrued interest exceeds the surrender value, the policy can lapse and you can lose cover and accumulated benefits.
Additionally, unpaid loans also reduce what your family receives as a maturity benefit, so you need to consider these factors and compare both policies before finalising your decision.
READ | Can You Take A Loan Against LIC Policy? Essential Factors To Know Before Borrowing
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