You must have bought traditional life insurance plans for investment purposes. But, you must also know that their return will not be more than 6% a year but could not surrender the policy as that may mean losing 60-70% premium that you have paid over the years. However, here is good news for you that, all is not lost. You can still salvage yourself partially by availing loan against your policies at reasonable rate
. Also Read: Looking for surrendering or Paid up LIC policies!
Check your Eligibility
First, check if your policy is eligible for the loan. An individual can avail of loans on all traditional policies, except moneyback plans, if he has paid premiums for at least three years. Ask the insurance company or the bank the amount you are eligible for. The next is applying for the loan and assigning the policy to the insurer/bank. This means all rights on the policy will be transferred to the lender. The loan is usually sanctioned in two-three days. But this may vary from company to company.
Interest Rates
The interest rates also vary from company to company. Insurers have their own criteria to arrive at the rate. Banks link it to their base rates. Banks, unlike insurers, do not charge a fixed rate-it depends on criteria such as the premium paid by the insured, the number of premiums paid. The rate is linked to the market rates and so keeps moving up and down. At present, private insurers offer loan against endowment policies at a higher rate of 11-14%.
Loan Limit
Every traditional policy acquires surrender value after premiums have been paid for at least three years. The guaranteed surrender value, which is the minimum amount available as loan, is 30% of the total premium paid, excluding the first premium amount. Let’s suppose, you have paid Rs50,000 as premium  for six years and take  the loan in seventh year, the total you have paid is Rs3 lakh. So the minimum loan you can get is 30% of Rs3 lakh minus Rs50,000, that is Rs75,000. Thus, you can borrow the maximum amount as 80-90% of the surrender value, including the cash value of bonus; the surrender value itself depends on the insurance company. The amount also depends on the terms and conditions of the policy as well as the surrender value decided by the actuarial department of the insurance company.
Repayment of Loan

The tenure and repayment clauses differ from insurer to insurer. The loan can be repaid for the remaining policy term. The insurer provides a repayment schedule. Life Insurance Corporation’s loans have tenures of at least six months. However, customers may pre-pay and foreclose the loan without paying any charges. If you wish to repay before six months, you have to pay interest for the full six months. In case of death of the policyholder or maturity of the policy, the interest will be charged only up to the date of death or maturity. If the person has taken a loan and fails to pay the subsequent premium, the policy will lapse. 
Though ideally one should buy only term plans and keep investments and insurance separate, it is no secret that traditional plans. Traditional plans offer little return and life cover, but premature closing may not be the best option. So, you are among the investor with a traditional plan, do not forget to avail of loan offered by these plans. Also Read: Term Insurance-True protection for your loved ones!
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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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