LIC Policy Loans: Everything Borrowers Must Know

One of the most intriguing things is that people who have a fully paid LIC policy still take the burden of a separate personal loan with interest as high as 18%. They simply don’t know that affordable options do exist, or, to be more precise, they simply are not aware that they could borrow against their LIC policy. This tactic is one of the most underrated financial tools in India, and to make this simple and accessible, this blog will guide you exactly on how this works and how you should calculate before signing anything.

How Loan Against LIC Policy Actually Works

A loan against an LIC policy is a secured financial arrangement through which a policyholder pledges his life insurance policy as collateral to receive funds. This is applicable only to traditional money-back policies, or those that give a lump sum amount at the end of the maturity of a policy. Hence, ULIPs are not considered for a loan against an LIC policy. The loan amount is tied to the surrender value of the policyholder. So, the amount of your loan depends on the surrender value that you have built over time by paying premiums.

Surrender value

In case a policyholder has paid the full premium amounts of an LIC, he can be eligible to borrow 90% of the surrender value. But for one whose premiums are still due, they can be eligible for 85% of the surrender value. The surrender value depends on:

l  Total premiums paid

l  Policy term and type

l  Number of years the policy has been active

When Does a Policy Become Eligible?

A policy should have remained active for at least 3 years with all premiums paid on time before it qualifies for a loan. This is a non-negotiable eligibility requirement that everyone needs to comply with before using this as a financial tool. The thing is, a surrender value takes a minimum of this timespan to grow into a meaningful value on which an insurer can give you a loan.

According to the IRDAI Annual Report 2024-25, policy loans are mandated on all savings-linked LIC products. This is a regulatory shift to use this as a financial tool as a safer and strategic alternative to separate personal loans with high interest rates. LIC alone sold over 1.77 crore individual policies in FY2024-25, representing an untapped source of loanable assets for policyholders.

Interest Rates, Calculations, and What Borrowers Must Compare

The current interest rate on policy loans, which are sanctioned between 1st May 2025 and 30th April 2026, is 9.50% per annum, compounding half-yearly for the entire loan value.

How It Compares to Other Loan Options

Here is a contextual example for better clarity on how a policy loan stacks up.

The lower rate is because of the surrender value of the policyholder, which acts as collateral, significantly reducing the lending risk compared to unsecured borrowing options.

How the Interest Is Actually Calculated

In general, life insurers use a reducing balance method to calculate the interest. This means you pay interest only for the amount you owe and not for the amount originally borrowed. With repayments, the interest keeps reducing. A simple example is shown below.

Suppose you borrow ₹1,00,000 at 9.50% per annum:

Each repayment will reduce the base on which the interest is calculated. The more you delay the repayment, the more interest you pay will accumulate, and this unpaid interest will be deducted from the maturity payout of the policyholder.

What Happens If You Do Not Repay

As there is no definite EMI deadline on a policy loan, there is no sense of additional comfort attached to the interest rate on loan on LIC policy. Rather, if the outstanding loan plus accumulated interest exceeds one’s surrender value at any given time, the insurer can readily terminate the policy. So, you can lose both the cover and long-term savings that you built over the years by paying premiums.

What a Calculator Must Show You Before You Commit

A reliable loan on LIC policy calculator should give you the following:

l  Total Interest Outgo–This should be applicable to the full loan tenure and not just the first year’s figure.

l  Year-wise Balance Reduction -This will provide you with clarity on the outstanding amount over time. 

l  Break-even Point - This is the point when your repayments meaningfully start reducing the principal

l  Maturity Value Impact - This is what your final payout will look if you delay repayments

l  Surrender Value Buffer - This indicates the safety margin between your loan value and the surrender value of your policy at any point

Final Thoughts

A loan against a life insurance policy is one of the few borrowing options where the asset you have already built does the heavy lifting. The rate is competitive, the process is straightforward, and the policy stays intact, provided you responsibly manage your repayments. What separates a smart borrower from a stressed one is not access to the loan but a clear understanding of the total cost, the repayment trajectory, and the long-term impact on the policy’s value.