How Interest Works on Loan Against Life Insurance

When sudden financial needs come up, many people in India see their life insurance policies as more than just a safety net — they can also be a handy source of funds in tough times. Taking a loan against your life insurance can be an easy and quick way to get access to money without complicated procedures. Still, before you decide to go ahead, it’s important to understand how the interest rates and charges are structured, as these details can make a real difference in what you end up repaying.

Key Takeaways

• Interest on loans against life insurance is generally lower than unsecured loans.
• Charges depend on the insurer, policy type, and loan amount.
• Knowing how interest accrues helps you avoid higher repayment costs.

What does “loan against life insurance” mean?

A loan against life insurance allows policyholders to borrow money using the surrender value of their policy as collateral. Instead of liquidating or surrendering the policy, you can pledge it and borrow a certain percentage of its value. This is especially useful if you want to retain life cover while addressing urgent liquidity needs.

For example, insurers often allow you to borrow 80–90% of the surrender value, depending on the policy terms.

How are interest charges calculated on such loans?

The interest rate charged on these loans varies by insurer and policy type. In India, rates typically range between 9% to 15% annually. Unlike unsecured loans (personal loans, credit cards), interest here is relatively lower because the life insurance policy serves as security.

• Mode of calculation: Interest is usually charged monthly or annually on the outstanding loan amount.
• Compounding: If you fail to pay interest regularly, the unpaid interest is added to the principal, increasing the overall liability.
• Variation across insurers: For instance, Bajaj Finserv and LIC may have slightly different interest brackets, and rates can change over time.

What factors influence the interest you pay?

Several aspects determine the final cost of borrowing:

1. Policy Type – Traditional endowment and whole life plans often have higher surrender values compared to term plans.
2. Loan Tenure – The longer you hold the loan, the more interest you accumulate.
3. Repayment Discipline – Timely payment of interest reduces compounding costs.
4. Insurer’s Terms – Each insurer sets its own base rate and margin.

Can unpaid interest impact your policy benefits?

Yes. If the loan and interest remain unpaid for too long, it can affect your policy’s value:

• The loan plus accumulated interest may be deducted from the maturity benefit.
• In case of the policyholder’s demise, the death benefit paid to nominees is reduced by the outstanding loan balance.
• If the loan balance exceeds the surrender value, the insurer may terminate the policy.

Are there better alternatives to borrowing against life insurance?

While loans against life insurance are accessible, they may not always be the cheapest or most flexible option. Alternatives include:

• Loan Against Mutual Funds (LAMF) – Generally quicker to process and may carry competitive interest rates.
• Personal Loans – Suitable for those without eligible insurance or mutual fund assets, though interest rates are higher.
• Overdraft Facilities – Offered by some banks for short-term liquidity needs.

Conclusion

Getting clear about how interest charges work on loans against your life insurance is key if you want to borrow wisely and protect your policy’s value. These loans are a quick way to access cash when you need it most, but keeping an eye on interest payments makes sure you don’t unintentionally diminish your long-term benefits. 

If you’re considering other flexible options, Quicklend’s Loan Against Mutual Funds is worth a look — it’s transparent, fast, and lets you meet your financial needs without having to compromise on your investment goals.