A life insurance policy primarily aims to offer financial security to beneficiaries in the unfortunate event of the policyholder’s demise. Surprisingly, these policies can also be leveraged as collateral to secure loans. We delve into the concept of loans against Life Insurance Corporation (LIC) policies, highlighting their features, advantages, and the application process.

Understanding Loans Against LIC Policies

A loan against an LIC policy is a secured loan where your LIC policy acts as collateral. Lenders, typically banks or financial institutions, hold the policy until full loan repayment. In case of default, lenders can claim the accrued policy benefits.

Eligibility for Loan Against LIC Policies

Not all LIC policies qualify for loans. Generally, endowment and money-back plans, which gather a surrender value, can be used as collateral. Pure term plans and unit-linked insurance plans (ULIPs) are mostly not eligible. Here are the LIC policies often used for loans:

• Endowment Policies
• Money-Back Policies
• Whole Life Policies

Key Details of LIC Endowment Plans

Below are the main features of loans associated with common LIC endowment plans:

• LIC’s Bima Jyoti: Eligible post 2 years premium; up to 90% for in-force policies, 80% for paid-up; interest at 10-year G-Sec Rate + 3%, compounded half-yearly.
• LIC’s Bima Ratna: Similar terms as Bima Jyoti.
• LIC's Dhan Sanchay: Similar terms as Bima Jyoti.
• LIC’s Jeevan Azad: Slight variation in interest calculation; either 10-year G-Sec Rate + 3% or Non-Linked Non-participating fund yield + 1%, whichever is higher.

Applying for a Loan Against LIC Policy

Loans against LIC policies can be applied for online or offline:

Online Process:

1. Register on LIC portal.
2. Navigate to ‘Online Services’ and select ‘Online Loans’.
3. Submit a request under ‘Online Loan Request’.
4. Upload KYC documents for verification.

Offline Process:

1. Visit an LIC office or partnering bank.
2. Carry necessary documents like policy and KYC proofs.
3. Fill and sign the loan application forms.
4. Upon approval, receive funds as a lump sum or overdraft.

Loan Amount and Repayment

Borrowers can typically secure between 70-90% of the policy's surrender value, subject to policy and lender terms. LIC provides flexible repayment methods:

• EMIs: Covering both interest and principal.
• Interest-Only: Periodic interest payments with principal due at maturity.
• Adjustment: Regular interest with the principal adjusted against maturity benefits.

Interest Rates

Loan interest rates against LIC policies generally range from 9.00% to 10.00% annually, although banks may set rates as high as 10.00% to 15.00%.

Advantages of Loans Against LIC Policies

• Lower Interest Rates: Typically less than personal loans or credit card rates.
• No Credit Check: Suitable for those with poor or no credit history.
• Continued Coverage: Life cover is maintained during the loan period.
• Quick Processing: Faster than other loan types.
• Flexible Repayment: Various options help minimize the financial burden.

Features and Benefits

• Secured Loan: Lower risk and interest due to policy collateral.
• Usage Flexibility: Funds can be used for any purpose, akin to personal loans.
• Minimal Documentation: Swift and straightforward approval process.
• Protection for Beneficiaries: In case of the insured's death, outstanding loans are deducted from policy benefits.
• No Impact on Credit Score: Ideal for people with bad or no credit history.

Important Considerations

While beneficial, loans against LIC policies require careful consideration:

• Repayment Responsibility: Ensure timely payment to safeguard policy benefits.
• Understanding Terms: Clearly grasp all loan terms including interest rates and penalties.
• Loan Amount Limits: Limited to surrender value, may not cover all financial needs.
• Policy Maturity: Loans require a policy to have amassed a surrender value, often after several years.

Conclusion

Securing a loan against an LIC policy can be an effective financial strategy during cash shortages or emergencies, offering secured funds at lower interest rates with flexible repayment. Timely repayment is essential to safeguard policy benefits, ensuring continued financial security for beneficiaries. Understanding the process, benefits, and limitations aids in informed financial decision-making and management.^{*[TDS]: Tax Deducted at Source, *[NBFC]: Non-Banking Financial Company}