Taking a loan against a life insurance policy is one of the smartest ways to access your funds without surrendering your policy or its accumulated value.

How does interest work on such a loan? What rate do you pay? What happens to your policy if you stop paying interest?
This article breaks down everything you need to know about interest on loans against life insurance and explains how BimaPay’s Surrender Value Financing makes the entire process faster, simpler, and more accessible than ever before.

Introduction

Most life insurance policyholders in India do not realise that their life insurance policy sitting is meant for more than just protecting their family. 

After a certain period, it’s a financial asset they can borrow against too at low interest rates without surrendering their accumulated value.

Surrender Value is used as collateral for the loan taken against life insurance. Even with such benefits, it continues to be one of the most underutilised financial tools by the Indian policyholders, largely because people either do not know it exists or find the traditional process too slow or confusing.

This guide answers all the questions you might have regarding this route thoroughly: interest rates, its calculation, compounding means of repayment, and what to be cautious about so you can make a fully informed decision.

What is a Loan Against Life Insurance?

A loan against life insurance allows you to borrow money by putting your policy as collateral. You do not surrender the policy. The insurer extends a loan typically up to 80–90% of your policy’s current surrender value, and the policy stays active throughout.

Your life cover continues. Your family’s financial protection is intact. And if your policy has an investment component (like a ULIP or endowment plan), that investment keeps growing even though your loan is outstanding.

Although not all policies are eligible. Generally, traditional savings-orientated policies are eligible after completion of a minimum number of premium payment years. Pure term insurance policies, which have no surrender value, are not eligible.

Policy Type	Eligible for Loan?	Basis for Loan Amount
Endowment / Whole Life Plan	Yes (after 3 years typically)	Up to 80–90% of surrender value
ULIP	Yes (after 5-year lock-in)	Up to 80–90% of fund value
Money-Back Plan	Yes	Based on accumulated surrender value
Pure Term Insurance	No	No surrender value accrues
Single Premium Policy	Yes	Based on surrender value

What Interest Rate Do You Pay?

Interest rates on loans against life insurance in India typically fall in the range of 9% to 15% per annum.

The rate is lower because the loan is secured; your policy’s surrender value acts as collateral, which significantly reduces the lender’s risk. This is why policyholders who use this option are essentially borrowing against their own accumulated wealth at favourable terms.

The exact rate depends on several factors: the insurer or lender offering the loan, the type of policy, the loan amount, and the overall interest rate environment at the time of borrowing.

Factors Affecting Your Interest Rate

1. Active Duration of Policy: The longer your policy has been active, the higher surrender value it’ll have and that in turn will make up for a good collateral. 

2. Duration of the Loan: Keep the loan duration short; it helps ease the burden of interest owed. 

3. Lender’s Base Rate: The RBI allows lenders to revise their base interest rates according to changes in monetary policy. If you have a fixed-rate loan, your interest rate remains unchanged despite these revisions. However, with a floating-rate loan, your interest rate may increase or decrease based on the lender’s revised rates.

What Happens to Your Policy If You Do Not Pay Interest?

This is the most important thing to understand before taking a loan against life insurance. The policy does not lapse immediately if you miss an interest payment, but the consequences build up over time.

Deduction from Maturity Benefit

If the loan and accumulated interest remain outstanding at the time the policy matures, the lender deducts the outstanding balance from the maturity payout. Your nominee or you receive the maturity benefit minus the outstanding loan. This is a predictable and manageable outcome if the loan amount is reasonable relative to the policy’s total value.

Reduction in Death Benefit

If the policyholder passes away while a loan is outstanding, the death benefit paid to the nominee is reduced by the outstanding loan balance (principal plus any accumulated interest). The nominee still receives a substantial payout — but it is reduced. This is why it is important to keep the loan amount and outstanding interest in proportion to the policy’s sum assured.

Policy Termination

In extreme cases — if the outstanding loan balance (including unpaid interest) grows to exceed the current surrender value of the policy — the insurer may terminate the policy entirely. This is the worst-case outcome and is entirely avoidable through regular interest payments and monitoring of the loan-to-surrender value ratio.

How BimaPay’s Surrender Value Financing Simplifies the Entire Process

Traditionally, securing a loan against a life insurance policy meant visiting your insurer’s branch, submitting physical copies of documents, and waiting days or sometimes weeks for the loan to be processed. Until BimaPay’s Surrender Value Financing (SVF) removes this friction entirely. Here is what makes it different:

• 100% Digital Process: From eligibility assessment to disbursement, everything happens online.
• Instant Eligibility Check: Enter your policy details on BimaPay’s platform and know your eligible loan amount almost immediately.
•  Transparent Interest Terms: BimaPay presents all interest rates, repayment schedules, and total cost of borrowing clearly upfront — no hidden charges and no surprise fees at repayment.
• Quick Disbursement: Once approved, funds are disbursed rapidly. This makes BimaPay SVF genuinely useful for financial emergencies where time matters.
• Policy Stays Fully Active: The life insurance cover continues throughout.
• RBI & IRDAI-Regulated Lenders & Insurers: BimaPay partners only with RBI-regulated lending partners as well as IRDAI-regulated insurance companies to ensure a legally compliant process.
• AAA-Rated Security: Backed by AAA-rated collateral — your policy — the loan carries strong credit integrity. BimaPay’s NPA stands at just 0.2%, reflecting the reliability of this model.
• Flexible Repayment: nterest payment schedules are structured to align with you and your financial situation.

Conclusion

For Indian policyholders, interest on loan against life insurance is a valuable financial option that remains largely underutilised. Compared to other unsecured loan options, this carries lower risk and lower interest rates and is also simple to secure.

The most important thing to keep in mind when considering this option is that it is not the same as taking an unsecured bank loan, which relies on creditworthiness. Instead, you are borrowing against something you already own. The interest you pay is the price you must pay in order to access this asset.

For policyholders looking for a simple and easy way to borrow against life insurance, BimaPay offers the Surrender Value Financing. You can now take a policy loan digitally, as you would do for an online purchase, with the RBI and IRDAI regulations ensuring that this service is safe and secure.

Frequently Asked Questions

How much interest do I pay on a loan taken against life insurance?

In India, interest is generally charged at an annual rate of 9% to 15% based on the lender, type of policy, and loan amount. This is much lower than the rate for personal loans or credit cards and thus a more economical product when compared to other secured borrowings.

What will happen to my loan if I do not pay the interest?

The outstanding interest will be added to the principal and will increase your liability. If the total liability exceeds your policy’s current surrender value, the insurer may terminate the policy. This can be avoided only by paying the interest regularly.

Will my life insurance cover reduce if I take a loan against my life insurance?

There is no impact on your life insurance cover. If you take a loan against your life insurance, your total sum assured remains in force. However, if the policyholder passes away with an outstanding loan, the death benefit will be the outstanding loan balance. Then there is no impact on your death benefit, but the death benefit will be adjusted against the outstanding loan.

Can I repay the loan before it is due?

Yes, prepayments are available for most loans against life insurance, usually with a minimum prepayment fee. Early repayment saves the total interest cost and the policy’s full unencumbered surrender value. Policies and their lenders are different, and prepayment terms should be confirmed with lenders.

What are the advantages of using BimaPay over going directly to my Insurer?

The whole process from when applying to receive funds in your account is completed within minutes to hours. This is so due to instant KYC, real-time eligibility assessment, and instant digital disbursement.

Does my policy earn returns while I have an outstanding loan?

Yes. While the loan is outstanding for ULIPS, funds continue to remain invested and earn returns. With traditional endowment policies, loans no longer impede the growth of the policy and bonus accumulation. Compared to surrendering the policy, this is a significant advantage.

Does BimaPay SVF have a minimum policy age or surrender value requirement?

Policies with accumulated surrender values are eligible, and endowment plans are typically available after 3 or more annual premium payments, whereas ULIPs are available after a 5-year lock-in period. BimaPay will evaluate your policy to the best of their ability based on the information you submit.