Types of loans available
You can use an LIC policy as collateral security to avail various kinds of loans. Suppose you are shifting to a new house and the advance deposit is a little beyond your means. Voila, you could take a personal loan against your LIC policy. Loan against LIC Policy come at a lower rate of interest and can be obtained at short notice as there will be minimal hassle of documentation.
If your child or sibling is opting for an academic course for which you cannot afford the fees, you could get an education loan using your LIC policy. If you want to buy a new vehicle or a used vehicle and are short of cash, this method of obtaining loan will be an easy way out. If the surrender value of your LIC policy is large enough, you could even use it as a security for a home loan!
How to avail the loanYou can avail a loan only against an LIC endowment policy. The policy should be at least three years old for you to be eligible to take the loan.
The loan can be availed either from the Life Insurance Corporation itself, or from banks and financial institutions that offer this option. However, rates of interest would vary – the banks would charge a higher rate of interest than the LIC for a personal loan on the same policy. For example, Axis Bank charges up to 12.5 percent for a loan with LIC policy as a security. The LIC, though, asks for only 10 percent interest.
You can take a loan of up to 90 percent of the surrender value of the policy including cash value of bonus. This decreases to 85 percent if the policy is already paid up. If you are able to clear one loan before the policy attains maturity, you can take a second one on the same policy.
You will have to surrender your original policy document to the LIC in order to avail the loan. Since the Corporation already has your verified details, you will not have to undergo further background checks, and the loan will be yours with minimal documentation.
Interest rate and repayment Most banks offer personal loans at a rate of interest between 15-20 percent. The interest rate on a policy from LIC is just 10 percent, payable every six months. This will mean a huge saving on monthly repayment instalments.
While you are expected to pay the interest on time, there is no compulsion on repaying the principal amount. You can allow the loan amount to be deducted from the policy payment when making a claim.
The loan duration is a minimum of six months from the date of payment. If you wish to repay the loan before the end of these six months, you will still have to pay the interest for six months. If the policy reaches maturity or claim due to the death of the policyholder in the initial six-month period of loan, interest will be charged only upto the date of maturity/death.
Other benefits Many banks ask for processing fees if you want to close your loan earlier than the stipulated tenure. A loan from the LIC against a policy has no hidden charges or processing fees. You can also close the loan after six months of taking it, without any pre-closure charges.
Obtaining a loan against your LIC policy is not only cheaper than other banks or financial institutions, it is a great way to make the best of the endowment policy that would otherwise stagnate as a tax exemption device. After all, it is your own money that you are borrowing.
However, be aware that by taking a loan on an LIC policy, you are putting the final claim amount at risk if you are unable to repay the amount on time. If an LIC policy is your only long-term insurance plan, then it would be advisable to repay the complete loan amount before the policy reaches maturity, so that its original purpose of serving as a pension or fall-back savings can be retained.