An LIC policy loan is one of the most underused financial tools available to policyholders. If you have been paying premiums on an LIC traditional plan for at least 3 years, you can borrow against your policy at a low interest rate - without credit checks, income proof, or lengthy bank formalities.

How LIC policy loan works

Your LIC policy builds a surrender value after a few years of premium payment. This surrender value is essentially the policy's current liquidation worth. LIC allows you to borrow up to 90% of this surrender value as a loan.

The loan is secured against the policy itself. If you default, LIC deducts the outstanding loan plus interest from the final claim or maturity amount.

Interest rate

LIC charges approximately 9 to 10% per annum on policy loans. This is lower than a personal loan (12 to 18%) and comparable to a gold loan. The key advantage over a gold loan is that you do not need to deposit physical gold - your policy itself serves as collateral.

Who can take this loan

Any policyholder of a traditional participating or non-participating endowment, money-back, or whole life plan that has been in force for at least 3 full years and has acquired a surrender value.

Term plans (pure risk policies) do not build surrender value and therefore do not qualify for loans.

Maximum loan amount

The loan amount depends on the surrender value of your policy. As a rough guide, after 5 years of premium payment on a 20-year endowment plan, the surrender value is approximately 30 to 40% of the total premiums paid. 90% of this amount is available as loan.

Documents required

The loan application process is simple:

  • ▸Loan application form (available at LIC branch or licindia.in)
  • ▸Original policy bond (as security)
  • ▸Identity and address proof
  • ▸NEFT form with cancelled cheque

Online loan application is also possible through the LIC policyholder portal.

Repayment

LIC policy loans do not have a fixed EMI structure. You can repay the principal and interest at your convenience. However, the interest accrues continuously. If you do not repay the interest, it is added to the principal and charged interest on itself - compounding the loan amount over time.

I always advise clients to at least pay the interest annually, even if they cannot repay the principal. This prevents the loan from growing uncontrollably.

What happens if you do not repay

If the outstanding loan amount plus interest equals or exceeds the policy's surrender value, LIC will terminate the policy and adjust the loan against the surrender value. This is called policy foreclosure. To avoid this, monitor your loan balance and make regular interest payments.

Tax treatment

LIC policy loans are not taxable. The amount received as a loan is not income. The interest paid is also not tax-deductible under any current provision.

A policy loan is one of the fastest ways to arrange funds in an emergency without selling assets or taking a high-interest personal loan. If you want to know how much loan your current LIC policy qualifies for, call me at 9415313434.