Can Life Insurance Policy Be Used As Collateral?

By Okbima 14 Jun 2024
can life insurance policy be used as collateral


A life insurance policy provides peace of mind for your family. However, you can not use a life insurance policy as collateral but you can take a loan against your life insurance policy. Let’s understand how you can use your life insurance policy to get a loan.


Can Life Insurance Policy Be Used As Collateral?

In India, you cannot use a life insurance policy as traditional collateral for a loan. However, there is a process called a loan against a life insurance policy.

Here's how it works:

  • Instead of using the policy itself as collateral, you borrow against the surrender value of your policy.

  • The surrender value is the cash value the insurance company would pay you if you surrendered (cancelled) your policy.

  • This option is available only for permanent life insurance policies like whole life or endowment plans, not term life insurance.

  • By taking a loan against your policy, the policy will be used as a security for the lender.


Protect Your Family Future: Compare Life Insurance Now!


Types of Life Insurance Policies

There are many types of life insurance policies in India such as Term Insurance, Whole Life Insurance, Endowment Policy, Unit Linked Insurance Plans, Child Insurance Plans, Pension Plans, etc.

  • Term Insurance: This is the simplest and most affordable type of life insurance policy. It provides coverage for a specified time, usually 10, 20, or 30 years. If the insured person dies during the term of the policy, the nominees receive a death benefit.

  • Whole Life Insurance: This type of policy provides coverage for the entire lifetime of the insured person. Premiums are higher than term insurance policies, but the policy also has a cash value option that grows over time and can be borrowed against or withdrawn.

  • Endowment Policy: This is a combination of life insurance and savings. The policyholder pays premiums for a specific time (usually 15-20 years) and at the end of the policy term, a lump sum amount is paid out, either as a death benefit or maturity benefit.

  • Unit Linked Insurance Plans (ULIPs): These are investment-cum-insurance policies that offer the policyholder the option to invest in many funds, including equity, debt, and balanced funds. The returns on ULIPs are linked to the performance of the underlying funds.

  • Child Insurance Plans: These are insurance policies specifically designed to protect the future of children. The policyholder pays premiums for a specified time and the policy matures when the child reaches a certain age, at which time a lump sum amount is paid out.

  • Pension Plans: Also known as retirement plans, these policies provide a regular income to the policyholder after retirement. These plans have both an accumulation phase and a payout phase, where the policyholder receives a fixed amount of income for a specified time.


Peace Of Mind For Yourself, Protection For Your Family: Get A Quote!


Other Ways To Use Life Insurance Policy

Life insurance policies can also be used to get loans, paid-up options, maturity benefits, surrender benefits, etc.

Loan Against Life Insurance Policy

As mentioned earlier, this isn't using the policy as collateral but using its surrender value.  This option is available with permanent life insurance policies (whole life, endowment) that accumulate cash value. The insurance company offers a loan based on a percentage of the surrender value. This can be helpful for unexpected financial needs.


Paid-up Option

This allows you to discontinue paying premiums while keeping the policy active with a reduced death benefit. This can be useful if you can't afford the premiums anymore but still want some coverage.


Policy Riders

Riders are add-on benefits you can attach to your base policy for additional coverage. Some common riders include Critical Illness Rider, Accidental Death Rider, and Disability Rider.


Maturity Benefit (Endowment Plans)

If you have an endowment policy and survive the policy term, you receive a lump sum maturity benefit along with any accumulated bonuses. This can be used for retirement planning or other goals.


Surrender Benefit

Though not ideal, you can surrender your policy in exchange for its surrender value (usually less than the total premiums paid). This is a last resort option if you desperately need money.


Don't Delay, Protect Your Family's Future Today: View Plans!


Why Get A Life Insurance Policy From Okbima?

There are many reasons why you should consider getting a life insurance policy from Okbima such as we offer financial security, peace of mind, affordable premiums, etc.

  • Financial security: Life insurance provides financial protection for your family in the event of your untimely death. It can help cover funeral expenses, outstanding debts, and ongoing living expenses for your dependents.

  • Peace of mind: Knowing that your family will be taken care of financially can provide you with peace of mind. You know that your family will not have to worry about financial strain if something were to happen to you.

  • Affordable premiums: Okbima offers competitive rates for life insurance policies, making it an affordable option for individuals and families looking to protect their financial future.

  • Customized coverage: Okbima offers many life insurance products to suit your specific needs and budget. Whether you are looking for term life insurance, whole life insurance, or universal life insurance, Okbima has options to fit your unique situation.

  • Excellent customer service: Okbima is known for its customer service and personalized approach to helping clients find the right life insurance coverage. Okbima has a “Team of Experts” who will help to get the best policy according to your needs.


Read More:

Claim Settlement Ratio For Life Insurance In 2022-2023: Importance & Process

Life Insurance Tax Benefits In India: Eligibility Criteria & How To Save Tax?

What is Life Insurance Policy? Benefits & How Does it Work in India

Difference Between Term Insurance and Life Insurance

Best Life Insurance Companies in India - [Updated 2024]



In conclusion, a life insurance policy can be used as security for a loan against its surrender value. There are different types of policies in India to choose from which offer many benefits like paid-up options and policy riders. It is important to choose a reputable provider like Okbima for financial security and peace of mind for your family's future.


Most types of life insurance policies, such as term insurance and endowment policies, can be used as collateral for a loan.

When using a life insurance policy as collateral, the policyholder assigns the policy to the lender as security for the loan. If the borrower defaults on the loan, the lender can recover the loan amount by cashing out the policy.

Yes, there may be limitations on the policy value that can be used as collateral, as well as restrictions on the type of policies that can be used.

Yes, it is possible to take multiple loans against the same life insurance policy, as long as the policy value is sufficient to cover the loan amount.

Using a life insurance policy as collateral can provide a lower interest rate on the loan, as the policy acts as security for the lender. This can be a cost-effective way to access funds when needed.

Leave a Reply