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Loan Against LIC Policy

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Loan against LIC policy refers to the process of borrowing money by pledging your Life Insurance Corporation (LIC) policy as collateral. Essentially, it allows you to secure a loan against the surrender value of your insurance policy. With this type of loan, you can easily tap into a financial resource without entirely surrendering the policy.

This avenue for financial assistance becomes increasingly crucial in times of sudden financial requirements or when other sources of credit might be less accessible. Recognising its significance, this article will provide a comprehensive understanding of the key details surrounding loans against LIC policies. 

Understanding Loan Against LIC Policy

In the face of unexpected financial challenges, many people instinctively think of personal loans as their immediate solution given their reputation for speedy processing. However, an often-overlooked yet faster alternative is the loan against a life insurance policy.

Specifically, the Life Insurance Corporation (LIC) provides a facility for its policyholders to avail of loans using their insurance policy as collateral. This means that the LIC insurance policy stands as a security guarantee for the loan acquired.

It's essential for borrowers to understand that if the policy reaches maturity and the loan remains unpaid, any outstanding loan amount will be subtracted from the maturity benefit. Moreover, in the unfortunate event of the policyholder's demise, the death benefit provided to the beneficiaries will be the total amount minus any outstanding loan.

This option, thus, combines the assurance of life insurance with the flexibility of a loan to address financial urgencies.

Eligibility Criteria and Documents Required for Loan Against LIC Policy

It's necessary to understand and meet the specific eligibility requirements set forth by the LIC to obtain a loan against the policy. Ensuring that you meet these criteria not only streamlines the loan approval process but also reinforces trust between the insurer and the borrower.

The main prerequisites for getting a loan against an LIC policy are as follows -

  • Citizenship: The applicant must be a citizen of India.
  • Age: The applicant should be aged 18 years or above.
  • Policy Status: It's essential for the individual to be a current policyholder with LIC, having made a minimum of three premium payments on their policy.

Documents Required for Loans Against LIC Policy

Initiating a loan against your LIC policy requires you to submit certain crucial documents that affirm the authenticity of your request and validate your credentials. The required documentation includes:

  1. Insurance Policy Bond: Original documents associated with the insurance policy bond
  2. Loan Application: A duly filled application form for availing the loan against the policy
  3. Assignment Deed: The document wherein the borrower assigns the loan to LIC, effectively using the policy as collateral
  4. Identity Proof: A valid identification document like an Aadhaar card, PAN card, Voter ID, and so on
  5. Address Proof: Documents like utility bills, Aadhaar card, or passport that verify the individual’s current residence
  6. Income Proof: Documents such as salary slips, income tax returns, or bank statements that reflect the individual’s financial status

Benefits of Obtaining a Loan Against LIC Policy

Leveraging an LIC policy to avail of a loan presents numerous advantages over conventional lending options. The unique nature of using an insurance policy as collateral leads to benefits that can greatly assist policyholders in their financial journey. 

Here's a deeper dive into the key benefits that you can enjoy with a loan against LIC policy -

  • Higher Loan Amount: For those looking to maximise their loan potential, an LIC policy loan can be particularly enticing. Policyholders can obtain an impressive 80% - 90% of their policy's surrender value, marking it as a standout option compared to other lending avenues.
  • Competitive Interest Rates: One of the main attractions of a loan against LIC policy is its comparatively reduced interest rates. While personal loans generally have around 13-15% interest, an LIC policy loan is available at a rate of around 10 to 12%. The exact rate is influenced by factors such as the frequency of premium payments and the premium amount; the higher these are, the more favourable the interest rate becomes.
  • Swift Loan Disbursal: Time is often of the essence during financial emergencies. Loans against LIC policies shine in this regard as they minimise bureaucracy and complicated paperwork. As a result, borrowers can expect to have their loans disbursed within a swift window of just 3-5 days.
  • Enhanced Security with Secured Loans: Given that the LIC policy acts as collateral for the loan, these loans are inherently secured. This not only instils greater trust in the lending process but also potentially allows for more favourable terms for the borrower due to the lowered risk for the lender.

Repayment of Loans Against LIC Policy

Repaying loans against an LIC policy is a straightforward process due to its distinct flexibility, quite unlike the structured monthly EMI system that is commonplace in other loans. The loan tenure can stretch anywhere from a short 6-month period up to the full maturity date of the insurance policy itself.

It's important to note, however, that if a borrower settles the loan within the initial 6-month window, the interest for the entire half-year duration will still be considered due.

Broadly, individuals have multiple avenues to approach repayment -

  1. Principal Plus Interest: Borrowers can choose to repay both the principal loan amount and the accumulated interest together.
  2. Offsetting Against Maturity: At the time the insurance policy matures, one can opt to adjust the principal loan amount against the maturity claim. This leaves just the interest to be paid separately.
  3. Annual Interest Payments with Distinct Principal Repayment: An individual might prefer to pay the interest yearly, postponing the principal amount's settlement to a different timeline or method.

It's crucial for policyholders to be mindful of two significant conditions. Firstly, if the outstanding debt surpasses the policy's surrender value, LIC reserves the authority to cancel the policy. 

Secondly, if the loan's repayment duration extends beyond the policy's tenure, LIC is entitled to deduct the outstanding loan amount directly from the policy's maturity sum. This ensures the safeguarding of LIC's interests while also providing clarity to borrowers about potential outcomes.

How to Obtain a Loan Against LIC Policy?

Individuals can initiate a loan application against their LIC policy through both digital and traditional channels. For those opting for the convenience of online procedures, here's a comprehensive breakdown - 

  1. Prerequisite: Only those registered for premium services on the LIC website can obtain a loan against the LIC policy via the online method.
  2. Website Navigation: Start the process by heading to the LIC's official website.
  3. Selecting the Right Option: Navigate to the 'Online Loan' tab.
  4. Portal Redirection: You will be seamlessly guided to a distinct webpage.
  5. Online Loan Request: Click on 'Through Customer Portal' to indicate your desire to apply for an LIC online loan.
  6. Authentication: For security, you will be prompted to enter your user ID, date of birth, and password.
  7. Policy Selection: Once authenticated, you can pick the specific policy against which you wish to secure the loan.
  8. Finalising the Loan Request: Navigate through the next steps to finalise your loan application.
  9. Loan Disbursal: If everything is in order, your loan will typically be processed and the funds transferred to you within a span of 3-5 days.
  10. Documentation: For record-keeping, the detailed loan documents will be sent to your registered email address.

Important Notes

  • Checking Loan Status: The ongoing status of your loan application can be reviewed online or by reaching out to LIC through SMS or a phone call.
  • Timely Interest Payments: If you lag behind on interest payments by more than 30 days past its due date, LIC retains the authority to terminate the policy to recover the loan amount.
  • Policyholder Demise: In the unfortunate event of the policyholder's passing, LIC can subtract both the outstanding loan amount and any accrued interest from the total claim amount. Subsequently, the residual sum will be forwarded to the policy's designated beneficiaries.

Wrapping Up

Taking a loan against an LIC policy offers an advantageous fusion of flexibility and security, providing policyholders with a valuable financial lifeline in times of need. Unlike traditional lending channels, these loans promise quicker disbursals, competitive interest rates, and the inherent assurance that comes from using an insurance policy as collateral. The streamlined online procedure simplifies the application process, ensuring a more user-friendly experience.

However, while the benefits are evident, it's imperative for potential borrowers to understand the intricacies — from eligibility criteria to repayment nuances — before diving in. Ultimately, as with any financial decision, it's essential to weigh the pros and cons to ensure that the choice that you make aligns with your financial circumstances and long-term goals.

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