Life insurance policies not only provide financial protection but can also serve as a valuable resource in times of financial need. A loan against your life insurance policy allows you to access funds without losing the long-term benefits and coverage your policy provides. Unfortunately, many individuals in India opt to surrender their policies to meet urgent financial requirements, unaware of the significant long-term consequences and the availability of better alternatives like a loan on LIC policy or other insurers.
Policy surrenders remain a significant concern in India. As per the Insurance Regulatory and Development Authority of India’s (IRDAI) Annual Report 2023-24, ~INR 2.2 lakh crore worth of policies were surrendered and withdrawn in FY ’24. The persistency ratio of the top life insurers in India is nearly 50% after the first five years. This trend shows that a large number of policyholders, in their search for liquidity, are prematurely surrendering their policies, or allowing them to lapse, thereby missing out on crucial long-term benefits and incurring substantial financial losses.
The Drawbacks of Surrendering a Life Insurance Policy
Choosing to surrender a life insurance policy can have repercussions for your financial well-being and the security of your family. Understanding these drawbacks is crucial before you consider this option.
- Loss of Protection: Surrendering your life insurance policy cancels the coverage, leaving your family financially vulnerable.
- Financial Disadvantage: The surrender value, especially in the early years of the policy, is often significantly lower than the total premiums paid. You can use our Surrender Value Calculator to understand the impact.
- Tax Implications: Surrender proceeds may attract taxes, depending on the policy type and duration, further reducing the net amount received. It is important to understand the tax implication on surrender. For ex.,
- For traditional policies, if premiums are not paid regularly during the first two years of the policy tenure, the surrender value is not eligible for tax exemption.
- For ULIP policies, the surrender amount is tax-free under Section 10(D) if the policy meets the required conditions. However, if the policy does not qualify under Section 10(10D)—such as being surrendered within the lock-in period—it becomes taxable as per the provisions of the Income Tax Act, 1961.
- Forfeiture of Long-Term Benefits: Many policies, particularly endowment and whole life plans, offer higher payouts, loyalty additions, or bonuses if held till maturity. Surrendering prematurely forfeits these potential long-term gains, undermining the original purpose of your investment
The Advantages of Taking a Loan Against a Life Insurance Policy
Opting for a loan against your life insurance policy offers a far more financially prudent approach to addressing immediate liquidity needs while preserving your long-term financial security.
- Retain Insurance Coverage: By taking a policy loan, you continue to enjoy the benefits of your insurance coverage, ensuring your family remains protected while you meet your immediate financial needs.Lower Interest Rates: Loans against life insurance policies typically have more favorable interest rates compared to unsecured loans like personal loans or credit card debt. This makes them a more cost-effective borrowing option.No Need for Credit Scores or Income Proof: Since your policy acts as collateral, there’s no need for extensive credit evaluations or income proof, making the process faster and simpler. This is a significant advantage for those who might not qualify for traditional loans.
- Access to Flexible Terms: Loans against policies often come with flexible repayment terms and minimal restrictions, offering greater convenience and adaptability to your financial situation
Tailored Insights with Mera Kal: Your Guide to Policy Loans
At Mera Kal, we empower you to unlock the financial potential of your life insurance policy with our intuitive Loan Eligibility Calculator. This tool simplifies the process, helping you make informed choices without hassle. Whether you're looking for a LIC surrender value calculator, SBI Life surrender value calculator, or a general surrender value of LIC policy calculator, our platform provides comprehensive insights.
Here’s how it works:
- Choose your policy from the list. If you are unable to find your policy listed, reach out to us and we will help you.
- Enter Your Policy Details
- View Instant Insights - Get an estimate of your policy’s surrender value and download a detailed report. This report showcases the financial impact of surrendering your policy versus taking a loan against it.
Let’s understand the personalised analysis from Mera Kal using an example:
Sunita Rao, a 38-year-old working professional, holds a LIC Jeevan Labh Policy - Plan 836, which she purchased in 2016. Recently, she found herself in need of financial assistance for a family emergency. Instead of surrendering her policy, she decided to explore the option of taking a loan against her policy. Here's how her loan eligibility and benefits would be calculated on our Loan Eligibility Calculator
Sunita’s Policy Details
Policy Name: LIC Jeevan Labh - Plan 836
Basic Sum Assured: ₹500,000/-
Premium: ₹6,869/-
Frequency: Quarterly
Policy Start Date: July 28, 2016
Policy Term: 21 years
Premium Paying Term: 15 years
Based on Sunita's consistent premium payments and the policy’s surrender value accumulation, she is eligible for a loan.
Loan Eligibility
Sunita’s estimated loan eligibility was calculated at 85% of the policy’s surrender value. Let’s break this down:
Estimated Surrender Value: ₹147,058/-
Loan Amount: ₹125,000/- (at 85% of surrender value)
Now let’s break-down the details of the loan:
Loan Details
Loan Amount: ₹125,000/-
Interest Rate: 10.48%
Tenure: 3 years
Monthly Repayment: ₹4,034/-*
Total Repayment: ₹145,203/-
Total Interest Paid: ₹20,203/-
(*Note: The actual repayment and interest rate are subject to final sanction by the lender.)
Why Loan Against Policy is Better Than Surrendering
Surrender Value Loss Calculation
Based on estimates, if Sunita chooses to surrender her policy today, she will receive only the current surrender value of ₹147,058/- and would stand to lose ₹256,501/- as her policy’s current value is over ₹400,000/-.
By surrendering, she would forfeit the long-term benefits of her policy, including:
Maturity Benefits: ₹5,00,000/- (basic sum assured)
Accrued Bonuses: ₹2,50,000/- (estimated bonuses accumulated over the policy term).
By surrendering, Sunita would lose in future:
₹5,00,000/-(sum assured) + ₹2,50,000/- (bonuses) - ₹1,47,058/-(surrender value) = ₹6,02,942/-
Review Report for Above Scenario - Net Benefit with Loan: By taking a loan instead: Sunita retains her policy and its benefits, including the life cover.
With a clear analysis of the risks and benefits, you’ll see why a loan is often a smarter alternative to surrendering your policy, as in the example above. Our personalized analysis highlights how you can retain your coverage whilst meeting your financial needs, where taking a loan is a more beneficial option. This is where tools like a LIC withdrawal calculator or calculate surrender value of LIC become invaluable for informed decision-making.
How to Choose the Right Lender For Your Policy Loan
When opting for a loan against a life insurance policy, it’s important to choose the right lender. Consider the following:
- Interest Rates: Look for competitive rates that make repayment manageable.Our OD interest calculator and Term Loan EMI Calculator can help you compare.
- Repayment Flexibility: Opt for lenders offering flexible terms that align with your financial situation.
- Transparency and Support: A reliable lender should offer clear communication and efficient customer service while also ensuring regulatory compliance.
At Mera Kal, we understand the value of your life insurance policy and the importance of retaining its benefits. As your trusted Loan Service Provider for policy loans, we are partnered with lenders who practice transparent loan processes, offer competitive rates, and expert guidance. With our online Surrender Value Calculator and Life Insurance Loan Eligibility Checker, we help you navigate the decision-making process on your policy loan and help secure your financial future.
Choosing a loan against a life insurance policy is a smarter alternative to surrendering it. It preserves your policy benefits while providing the funds you need. By partnering with a reliable service like Mera Kal, you can maximize your policy's value and ensure financial stability for you and your family. Start your journey today and explore the options tailored to your needs with Mera Kal