Introduction
Life insurance policies are designed to provide financial protection for your loved ones. But beyond this core benefit, certain life insurance plans — like endowment policies, money-back plans, ULIPs or guaranteed return policies — also build up savings over time.
Once your policy accumulates enough surrender value or fund value, it can be used as collateral to borrow money. Many people opt for loans on life insurance for medical expenses, business investments, home renovations and education fees.
Many people choose to take loans against life insurance policies because:
✔ The loan is relatively easy to get, as it's secured against your policy
✔ Interest rates are lower compared to unsecured loans like personal loans or credit cards
✔ It’s a better option than surrendering the policy for liquidity - keep your life cover and savings
But when considering a policy loan, an important question arises, Do I need to keep paying both the loan EMIs (or interest) and my regular policy premiums?
Yes, ideally you should continue paying both. Let’s break this down.
Both play a different role in your financial portfolio.
Premium Payments: These keep your life insurance policy active. If you stop paying premiums, the policy can lapse, which means no life cover and no benefit to your family.
Loan Repayments: These are payments you make towards the loan you've taken by pledging your policy. Some lenders offer EMIs (principal + interest), while others offer an overdraft facility where only interest is paid monthly on the amount drawn.
In short: The premium keeps your policy alive, the loan repayment clears your debt with the lender.
What If You Cannot Pay Both? Are There Options?
Ideally, you should continue paying both - your life insurance policy premiums and life insurance loan repayment - to avoid any complications.
However, in some situations, managing both can be difficult, especially during a period of financial strain. To support policyholders in times of financial stress, many insurers have in-built features to reduce the burden. Check if your policy offers any of the following features:
✔ Cover Continuation Benefit: Many life insurance policies allow your life cover to remain active for a specific period (often 1-2 years) without premium payments. This helps prevent immediate lapse of your policy, but it's only a temporary safeguard and is especially useful if you're facing a financial crunch, such as when repaying a loan against your policy.
LIC offers one of the most well-known Auto Cover Period features: If you’ve paid premiums for at least 3 full years, the life cover continues automatically for up to 2 years even if you miss payments. This ensures your nominee is protected during this buffer period. Applicable mostly on traditional endowment and money-back plans.
Private insurers such as HDFC Life, ICICI Prudential Life, SBI Life, Max Life, Bajaj Allianz Life, Tata AIA Life, Aditya Birla Sun Life also offer a similar feature. The eligibility period varies by insurer and policy, but typically if you’ve paid premiums for 2–3 years, the policy doesn’t lapse immediately. Life cover may continue for a limited period, often called “cover continuance” or “auto cover,” funded by the surrender value or non-forfeiture clause in the policy.
Some insurers may continue the cover by converting the policy into a “paid-up” status - meaning the cover amount is reduced but still active. This benefit usually applies only to traditional savings plans (endowment/money-back), not to term insurance or newer ULIPs (sold after 2010), unless explicitly mentioned.
Newer ULIPs (post-2010) do not include this feature. If fund value falls below a threshold or premiums are missed, the policy may lapse without notice unless the revival terms are met. During this phase death benefits stay active, and are reduced proportionally if premiums have been skipped and the policy may enter “paid-up” status if no further payments are made.
✔ Premium Holiday Option: Some policies give you the flexibility to pause premium payments for a limited period without losing your cover. It is often a feature that’s built into select policies, and must be chosen at the time of purchase or become available after completing a few policy years. During a “premium holiday”, your life cover continues without incurring any penalties or lapses. Unpaid premiums can be adjusted from the fund value or deferred, depending on product structure.
Some ULIPs and modern savings plans offer Premium Holidays, though the feature is usually not available in term plans or traditional endowment and money-back plans. Popular life insurers such as HDFC Life, ICICI Prudential, Tata AIA Life, Max Life, SBI Life, Aditya Birla Sunlife and Bajaj Allianz Life all offer Premium Holidays on select ULIP plans after 3–5 policy years allowing premiums to be paused for 1–2 years. LIC however, does not offer a formal premium holiday feature in most plans. Instead, it relies on auto cover (as discussed earlier) or paid-up conversion to keep the policy active.
This feature can help you manage your finances better in the short term, whilst you have a loan active.
Both Cover Continuation and Premium Holiday options are subject to your insurance policy. Always check the terms and conditions before taking a loan by pledging your life insurance policy, especially if you feel managing both premium and loan repayments might be difficult.
What happens if I don't repay my life insurance policy loan?
If loan repayments stop:
➤ The lender can surrender your policy to recover the loan amount.
➤ Interest and penalties keep building on the outstanding loan amount
➤ Your credit score will get negatively affected, restricting your ability to access future loans
➤ At maturity or death, the insurance payout goes to the lender first to clear dues, and only any remaining balance is paid to your nominee or family
In rare cases, if the total dues exceed the policy payout, your family may receive little or no amount. Hence, regular repayments are in your best interest.
What Happens If I Don’t Pay the Premium?
If you stop paying premiums:
✔ The policy may lapse, ending your life cover, or go into “PaidUp” status.
✔ A lapsed policy reduces your accrued savings.
✔ You lose both insurance protection and potential maturity benefits.
✔ Loan eligibility gets affected if the policy lapses before taking the loan.
In order to get a loan against your policy, it is mandatory to have an active policy, as lapsed policies cannot be pledged.
Conclusion
Using your life insurance policy to access a loan against policy can be a smart way to handle urgent expenses without surrendering your policy or losing valuable long-term benefits.
But remember, your policy doesn’t automatically pause just because you’ve taken a loan. Premiums still need to be paid to keep your cover active, and loan repayments (especially interest) help avoid deductions from your payout later. When considering paying loan vs premium life insurance, it's crucial to understand both are vital. If managing both payments feels overwhelming, explore your options - check if cover continuance or a premium holiday is an option for you.
It’s best to plan your finances carefully before borrowing; consider how the loan EMIs and other expenses fit into your monthly budget, and only borrow what you’re confident you can manage. Staying prepared helps avoid stress later.