Life is unpredictable, and financial needs can arise in various situations—whether it’s funding your child’s education, covering medical emergencies, managing a cash flow gap in your business, or handling unexpected home repairs. In such cases, people often lean towards taking a loan. While personal loans are widely used, it is also tempting to dip into your long term savings such as your pension funds or your life insurance policies to fund immediate cash requirements.
Whilst using long term nest-eggs to fund short term requirements is never advisable, if you find yourself left without other options it’s good to understand how withdrawing from pension funds or taking a loan against a life insurance policy work to access liquidity. Whilst both approaches can provide financial relief, let’s explore them in detail to help you make a well-informed decision.
Understanding Pension Fund Withdrawals
The pension funds we refer to here are restricted to those managed by the government, such as Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), Public Provident Fund (PPF), and National Pension System (NPS). Each of these publicly managed pension schemes varies in design, eligibility, and withdrawal rules.
Differences Between EPF, VPF, PPF, and NPS
Key Features of Pension Fund Withdrawal:
✔ Access to funds processed within weeks (if eligible under withdrawal rules)
✔ No repayment required, no interest charged – it’s your money
✔ May incur tax liabilities depending on the amount and withdrawal reason
✔ Reduces retirement corpus, affecting future financial security
✔ Subject to withdrawal rules set by the government or pension provider
When Can You Withdraw from a Pension Fund?
Pension funds typically have restrictions on withdrawals. In many cases, partial withdrawals are allowed only under specific conditions, such as:
Medical emergencies
Home purchase or renovation
Higher education expenses
Unemployment (for a specific period)
How to Withdraw from a Pension Fund
Withdrawing from a pension fund involves multiple steps and varies based on the type of pension plan and government regulations:
Check Eligibility: Ensure that your withdrawal request falls under the permitted reasons outlined by the pension authority.
Submit an Application: File a withdrawal request with your pension provider, either online or in person, along with necessary documentation such as medical bills, proof of unemployment, or education-related expenses.
Tax Implications Review: Understand the tax impact of your withdrawal. In some cases, a portion of the withdrawn amount may be subject to income tax.
Processing and Approval: Once the application is submitted, it undergoes review, and upon approval, the amount is disbursed to your account within a specific timeframe.
For more details on NPS withdrawal, refer to this detailed article by Mint.
Withdrawing pension savings should be a last resort, as it impacts your long-term financial stability.
Understanding Loans Against Life Insurance
Life insurance is typically used as a long-term savings instrument in India. It is often viewed as a tax efficient, risk free option for many middle-income families. Most life insurers in India also offer pension plans, which are also long term savings designed to offer an annuity post retirement.
A loan against a life insurance policy lets you borrow money using your policy’s surrender value as collateral. This is a great option for those who want quick access to funds without risking their retirement savings or physical assets. The key reason why customers may choose to take a policy loan when in need of funds, is that the penalty to surrender a policy is extremely high, and in some cases such as ULIP or pension plans, there could be restrictions on surrender, in the form of lock-in periods or forced purchase of annuities. In such instances, leveraging the policy for credit, allows the policyholder to maintain their long-term savings, keep the insurance protection and access funds simultaneously.
Key Features of a Loan Against Life Insurance:
✔ Loan amount: Typically 60-90% of the surrender value, depending on the underlying asset type
✔ Lower interest rates than unsecured personal loans and credit cards
✔ No impact on retirement savings – policy benefits remain intact
✔ Flexible repayment options (EMIs or deduction from policy maturity)
✔ Quick disbursal with minimal paperwork
How Does a Loan Against Life Insurance Work?
When you take a loan against your life insurance policy, the insurance company or lender provides funds based on the policy’s surrender value. The policy remains active as long as the interest and principal payments are made. If you fail to repay the loan, the outstanding amount may be deducted from the policy’s maturity value or death benefit.
Steps to Apply for a Loan Against Life Insurance
Check Policy Eligibility: Lenders assess whether the life insurance policy qualifies for a loan. Policies with sufficient surrender value are preferred.
Review Offer: The lender makes an offer basis a percentage (typically 60-90%) of the policy's surrender value and other policy terms
Submit Loan Application: The borrower accepts the offer and submits an application including KYC and bank details
Assignment: Policyholder requests assignment of their policy to a lender, insurer accepts
Disbursal: Once assignment is accepted and the loan is approved, the funds are disbursed quickly.
Repayment: Borrowers can choose to repay through EMIs or flexibly if they have taken an overdraft.
Comparison: Pension Fund Withdrawal vs. Loan Against Life Insurance
Which One Should You Choose?
Withdrawing from your pension fund may seem like an easy way to access funds, but it comes at the cost of your retirement security. If choosing to do this, try to replenish your retirement corpus over time whether through PF, NPS or other investment portfolios. In contrast, taking a loan against a life insurance provides liquidity without compromising your future financial plans, although this option does come with a repayment obligation.
Before making a decision, carefully evaluate your financial situation, repayment ability, and long-term goals to choose the best option for your needs.If you are eligible for other types of secured loans and can avoid putting your long-term savings at risk, do so.
Explore your options using the Mera Kal Sahi Secured Loan Finder or reach out on WhatsApp for support.