Life Insurance Corporation of India (or LIC) is an Indian state-owned insurance group and investment company with headquarter in Mumbai.
The LIC of India was founded in 1956 when the LIC Act was passed by the Parliament of India that nationalised the private insurance industry in the country. More than 245 insurance companies and provident societies were merged to create the state-owned Life Insurance Corporation.
Investment in LIC policies is made with an intention to protect the family from financial distress in case of any eventuality. Now investment in LIC policies has become even more beneficial with the availability of a loan on the policy in case of an emergency.
Features of Loan Against LIC Policy
The following are the key features of the Loan Against LIC Policy:
- The quantum of the loan available is 90% of the surrender value. Surrender value is the value that a policyholder will be given if the policy is surrendered before the maturity of the policy. An endowment policy acquires surrender value after premiums have been paid for 3 years. It is 30% of the basic premiums paid, excluding the first year premium. Premiums for riders such as accidental death benefit are not included in the calculation.
- The loan can be availed against endowment policies only. Term plan insurance policies are not eligible for a loan.
- The minimum tenure of the loan is 6 months. If there is a claim either due to maturity of the policy or the death of the policyholder within 6 months from the date of the loan then, interest will be calculated only till the date of maturity/death.
- You can either pay the loan along with interest or just pay the interest and allow the principal amount to be deducted from the accumulated corpus during claim settlement.
- The loan can be taken more than once on the policy by clearing the earlier one.
- Interest on the loan has to be paid once in 6 months.
- The policy will be assigned to LIC and all the rights of claim will lie with LIC till the loan is cleared
- If you feel that you are stuck with an endowment policy of long term, you can avail fringe benefit on the policy by taking a loan at an interest which is much less compared to Personal Loans from banks. Though the returns and life cover offered for these policies are much less when compared to term plans, premature closure is not a good option. Instead, availing a loan would be a wiser option.
Policies That are Eligible for a Loan
LIC India permits policyholders to avail a Personal Loan against their LIC endowment policies. Some of the plans that qualify for a Personal Loan are as given below:
- Jeevan Pragati
- Jeevan Labh
- New Endowment Plan
- Single Premium Endowment Plan
- New Jeevan Anand
- Jeevan Rakshak
- Limited Premium Endowment Plan
- Jeevan Lakshya
What is the Surrender Value of a LIC Policy?
LIC surrender value is the amount payable by the LIC to the policyholder when the policy is surrendered before the maturity of the policy. There is a lock-in period of 3 years for a LIC policy. The policy can be surrendered after completion of 3 years from the date of issue of the policy and the premiums are paid regularly.
On surrendering the policy all the benefits vested in the policy along with protection cover will cease to exist. It is not wise to surrender the policy when in need of urgent funds. The alternative would be to avail a loan against the policy. Surrender the policy if you are dissatisfied with the terms and conditions and do not genuinely intend to continue with it.
Guaranteed Surrender Value: This is the surrender value guaranteed by the insurance company to the policyholder in case of submitting for a claim before maturity.
In case of regular premium policy, Guaranteed Surrender Value of LIC policy is 30% of the basic premium paid. The Company excludes the first year?s premium paid while calculating the surrender value.
In a single premium policy, the Guaranteed Surrender Value will be 90% of the single premium paid. The Company will exclude the extra premiums paid if any.
Guaranteed Surrender Value of Vested Bonuses: Along with the Guaranteed Surrender Value, the Company will also pay surrender value of vested bonuses, if any. The Surrender value of vested bonuses is vested bonuses multiplied by the policy surrender value. The percentage applicable will range from 16% to 35% depending upon the policy year (the year in which the policy is surrendered).
Special Surrender Value: LIC India will pay a Special Surrender Value to the policyholder, which will either be equal to the guaranteed surrender value of more than the guaranteed surrender value. This Special Surrender Value will depend upon the period for which the premiums have been paid and also the term of the policy at the time of surrender.
Either the Guaranteed Surrender value or the Special Surrender Value, whichever is higher will be paid by the Company at the time of surrender of the policy.
LIC Surrender Value Calculator
Now with the availability of the facility to apply for a Loan Against LIC Policy online through their official website, LIC has also introduced the Surrender Value Calculator.
This will enable you to calculate the surrender value of your policy before applying for the loan. With this, you will get an idea about the quantum of loan available for you and decide whether to go for it or not.
Advantages of Availing Loan Against LIC Policy
In addition to the loan being available without any cumbersome eligibility procedure, there are other advantages of availing Loan Against LIC Policy:
- Now you can apply for the loan online which has substantially reduced the loan processing and disbursal time.
- You don't have to submit a pile of documents. The only document that is required is the original LIC policy.
- Even without a good credit score, you can avail Loan Against LIC Policy. Policy assigned to LIC is like a cash margin which entitles them to recover the dues by surrendering the policy, in case the borrower defaults payment.
- The interest on Loan Against LIC Policy is much less when compared to a Personal Loan
Disadvantages of Availing a Loan Against LIC Policy
Advantages of availing a loan against LIC Policy are many, but it is not devoid of disadvantages. The disadvantages of availing a loan against LIC Policy are:
- The quantum of the loan is restricted to the surrender value. At times you may not get the quantum required for the purpose it is availed for.
- No tax deduction is available for the loan
- In the event of the tragic death of the policyholder, the claim amount gets considerably reduced since the outstanding loan balance will be deducted from the claim amount.
How to Apply for a Loan against LIC Policy?
- Firstly, register on the LIC website. The link to register can be found on the LIC website's home page.
- You can click on the Customer Portal. Click on the New User. Already registered users can simply log in.
- You will need your policy details and some personal details like Pan number/ Aadhaar number/ Passport details to register on the website. The details should match with details as mentioned in the policy.
- Once you have registered, you can log into the LIC customer portal
- After logging in, register for LIC Premier Services to apply for the loan against your policy online
- To apply for the LIC Premier Services, you need to go to Service Registration-> Service Request-> Premier Services Registration.
- The registration is just a 3-step process. You have to download an auto-generated form, take a printout of the form and sign it, and then scan and upload the document on the portal. Also upload a scanned copy of your Pan/ Aadhaar/ Passport for identification.
- Subsequently, you can expect to recieve approval for Premier Services in a few days or weeks
Not only LIC but also banks provide a Loan Against LIC policy. Given below are the details of loans provided by various banks against LIC policy. A loan will be given against a list of approved policies. These include unit-linked plans, endowment plans, whole life plans, and income plans. However, a term insurance policy does not qualify for a loan.
Banks Offering Loan Against LIC Policy
Bank of Baroda Loan Against LIC Policy
The features of Bank of Baroda Loan Against LIC Policy are:
- Eligibility: All resident Indians above 18 years are eligible
- Nature of facility: Term Loan/Overdraft
- Purpose: No restriction on end use
- Quantum of loan: Minimum quantum for Term Loan is 3,000 and for Overdraft is 20,000. The maximum amount is proportionate to the surrender value of the policy.
- Margin: It is 15% of the surrender value if the insurance policy is maturing within three years. 20% of the surrender value if the residual maturity period is three years and above.
- Repayment: The loan amount along with interest to be repaid within 60 months.
- Interest: Interest is One-year MCLR (8.65% as on 14.05.2019) + Strategic Premium + 3.50% = 12.15%.
- Processing fee: Nil
- Documents required: You have to submit the original policy document along with income proof and address proof.
HDFC Bank Loan Against LIC Policy
The features of HDFC Bank Loan Against LIC Policy are:
- Eligibility: Resident Indian above 18 years are eligible for the loan
- Nature of facility: Overdraft
- Quantum of loan: Loan amount up to 80% of the surrender value of the policy is sanctioned with a minimum of 2 Lakhs.
- Margin: It is 20% of the surrender value of the policy
- Repayment: Only overdraft facility is provided. Hence, it will be revolving by nature and will be reviewed every year. Renewal of the limit is at the discretion of the branch.
- Interest: Interest will be linked to MCLR and is as applicable from time to time. Interest will be collected only to the extent of the amount utilised. For instance, if you are sanctioned with a limit of 2 Lakhs and you have utilised only 50,000. Interest will be charged only on 50,000 and not on 2 Lakhs.
- Processing fee: Processing fee is at 1% of the loan amount. Also, an annual maintenance fee of 0.50% of the limit sanctioned with a minimum of 2,500 and maximum of 5,000 will be collected.
- Documents: Address proof, income proof, the original policy of the document, and premium paid receipt.
Axis Bank Loan Against LIC Policy
The features of Axis Bank Loan Against LIC Policy are:
- Eligibility: All resident Indians above 18 years of age are eligible for Loan against LIC policy.
- Nature of facility: Overdraft facility. On approval of the limit, an overdraft limit will be fixed for the current account of the borrower maintained with the bank.
- Quantum of loan: It is 85% of the surrender value of the policy
- Margin: It is 15% of the surrender value of the policy
- Repayment: It is an overdraft facility which is revolving by nature. Eligible for review every year. Renewal of the limit is at the discretion of the bank.
- Interest: This loan is available at a competitive rate of interest, starting at 10.50%. Interest will be charged only to the extent of the amount withdrawn from the account and not for the entire sanctioned limit.
- Processing fee: Processing fee is at 0.15% of the loan amount or 1,000 plus GST whichever is higher. Renewal fee at 1,000 plus applicable tax will be collected.
- Documents: Address proof, income proof, original policy document, and a premium paid receipt.
Frequently Asked Questions
What is the quantum for Loan Against LIC Policy?
The maximum quantum of loan will be 90% of the surrender value of the policy provided you have paid premiums for 3 years regularly, from the date of issue of the policy.
What is the minimum tenure on LIC Personal Loan?
The minimum period allowed to repay LIC Personal Loan is 6 months.
What happens if a borrower defaults in paying the interest?
If the interest is not paid even after 30 days from the due date, LIC will foreclose the policy and settle the loan with the proceeds.
How to apply for a loan against LIC Policy?
Now you can apply for a loan against LIC policy online through their official website by subscribing to the LIC Premium Services after registering yourself. Or else, can avail the loan from a bank.
What happens to the loan in the event of the death of the policyholder?
In the event of the death of the policyholder before the maturity of the policy, the claim will be settled and the outstanding principal and interest towards the loan will be settled and the differential amount paid to the nominee.
What happens in case the borrower defaults in paying the loan amount?
In case of default and the outstanding amount in the loan account accumulating beyond the surrender value, LIC will foreclose the policy and clear the outstanding amount with the claim proceeds and any differential amount will be credited to the account of the policyholder.