Loan Against Insurance vs Personal Loan: Which Is Better and Why? A Complete Guide to Choosing the Smarter Option

When financial emergencies hit, most people naturally think of a personal loan. It’s quick, convenient, and widely available. But convenience often comes at a price—high interest rates, strict eligibility rules, and the risk of damaging your credit score if you default.

On the other hand, many of us already hold life insurance policies, especially from companies like LIC, which quietly build cash value over the years. What many policyholders don’t realize is that these policies can unlock a much cheaper and safer borrowing option: a loan against insurance.

So which one is better for you—a traditional personal loan or a loan against your life insurance policy?
This detailed guide breaks down every aspect in simple language, backed by expert opinions, so you can make the best financial decision with confidence.

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1. What Are These Two Loan Options?

Personal Loan

A personal loan is an unsecured loan, meaning you don’t have to provide anything as collateral. Banks and NBFCs lend based on your credit score, income stability, and repayment capacity. While personal loans are usually easy to get, they come with:

• Higher interest rates (often 12–18% or more)

• Strict eligibility criteria

• Heavy penalties for missing EMIs

• Strong impact on your CIBIL score

Loan Against Insurance

A loan against an insurance policy is a secured loan. Your life insurance policy—mainly the surrender or cash value—acts as collateral. You borrow from the insurer, like LIC, at significantly lower interest rates.

Key features include:

• Lower interest (often 8–10%)

• Minimal paperwork

• No need for income proof or high credit score

• Little to no impact on CIBIL even if EMIs are missed

• Quick disbursal

This makes it an attractive alternative for policyholders.

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2. Why Personal Loans Are Popular—but Costly

Even though personal loans are expensive, many borrowers choose them because:

✔ Easy access

Almost every bank and NBFC offers personal loans. Online apps make the process even faster.

✔ No collateral required

You don’t risk any asset if something goes wrong.

✔ Instant approval in many cases

Salaried employees with a good credit score get approvals within minutes or hours.

✔ EMI-based predictable repayment

Fixed interest and monthly EMIs simplify planning.

However, these benefits come at the cost of higher interest rates and strict credit checks. This makes personal loans less suitable when you already have cheaper borrowing options available.

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3. Why Loans Against Insurance Are Gaining Popularity

Loans against insurance policies, especially life insurance policies like those from LIC, offer several advantages:

✔ Lower interest rates (major benefit)

Personal loan rates often touch 15–18%, while loans against insurance can be as low as 8–10%.
This difference can save you thousands or even lakhs over the repayment period.

✔ Minimal paperwork

Your policy details are already with the insurer. No additional verification needed.

✔ You don’t need a high credit score

Insurers lend based on the policy’s surrender value, not your CIBIL score.

✔ No CIBIL damage if you default

This is one of the biggest advantages.
As expert Ronak Morjaria explains:

“Default in EMI does not affect your CIBIL. The maturity amount gets reduced automatically against the defaulted EMIs and penalties.”

This applies only when borrowing directly from the insurer, not from a bank using the policy as collateral.

✔ Quick disbursal

Funds are usually released within a couple of days, sometimes the same day.

✔ Tax benefits remain intact

Since the policy remains active, tax benefits under Sections like 80C continue.

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4. Expert Insights: What Financial Advisors Recommend

Abhishek Soni (Tax2win) explains:

“A loan against insurance is usually better when you already have a policy with a good surrender value. The interest is lower, the process is simple, and the loan is not taxable.”

However, he also warns:

“If you don’t repay the loan and the policy lapses or is surrendered, the unpaid amount may reduce your benefits and can also lead to tax being charged on gains.”

Ronak Morjaria (ValueCurve Financial Services) highlights:

“The ROI (interest rate) is the same for all customers regardless of CIBIL score. Also, defaults won’t impact your credit report when borrowing directly from the insurance company.”

These expert inputs make it clear:
If you have a life insurance policy with a good surrender value, a loan against it is almost always cheaper and safer than a personal loan.

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5. Detailed Comparison: Personal Loan vs Loan Against Insurance

Below is a simple, point-by-point comparison:

Feature	Loan Against Insurance	Personal Loan
Interest rate	Low (8–10%)	High (12–18% or more)
Credit score needed	Not needed	Strong CIBIL required
Loan approval time	Quick (1–2 days)	Quick (hours to days)
Paperwork	Very minimal	Moderate
Loan amount	Based on surrender value	Based on income & credit
Impact on CIBIL	None if taken from insurer	Yes—missed EMIs damage score
Risk	Policy benefits may reduce if unpaid	No collateral at risk
Tax impact	Loan not taxable	Loan not taxable
Eligibility	Requires insurance policy	Requires credit & income stability

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6. When a Loan Against Insurance Is Better

This option is best for people who:

✔ Already have a life insurance policy

Especially traditional plans with savings components like LIC’s endowment or money-back policies.

✔ Want lower interest rates

Reducing your interest burden makes repayment easier.

✔ Want quick access to funds

Insurers already have your KYC and policy details, reducing verification needs.

✔ Don’t want to risk their CIBIL score

Since defaults do not directly impact your credit rating, you stay protected.

✔ Need short- to medium-term funds

The loan is ideal for emergencies, business needs, or clearing high-interest debts.

✔ Prefer flexible repayments

You can repay whenever you want without strict EMI structures.

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7. When a Personal Loan Is Better

A personal loan is more suitable if:

✔ You need a large amount

If your insurance policy’s surrender value is low, you won’t get a high loan amount.

✔ You don’t want to risk reducing your policy benefits

Non-repayment can reduce your maturity amount.

✔ You want structured EMIs

Fixed EMIs help with disciplined repayment.

✔ You don’t have insurance with cash value

Term insurance policies don’t offer loan facilities.

✔ You need funds instantly and don’t want to check policy values

Personal loans from apps and banks can be disbursed within minutes.

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8. How Much Can You Borrow Against Insurance?

The loan amount depends on:

• Policy type

• Surrender/cash value

• Years completed

• Insurer’s rules

Typically, insurers allow 80–90% of the surrender value as a loan.
For example:

• If your policy’s surrender value = ₹2,00,000

• Loan value may be = ₹1,60,000 to ₹1,80,000

This amount may or may not meet your needs, so check before deciding.

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9. Risks You Should Know Before Taking a Loan Against Insurance

While attractive, this option also has some risks:

1. Policy benefits may reduce

If you fail to repay, the insurer deducts the outstanding amount from your maturity or death benefit.

2. Policy may lapse

If the unpaid loan amount exceeds the surrender value, the policy may terminate.

3. Taxation risk

If the policy lapses, tax may apply to the gains.

4. Limited loan amount

You can borrow only based on surrender value—not as much as you want.

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10. Risks of Personal Loans

Personal loans also come with risks:

1. High interest burden

Missing EMIs can spiral your debt.

2. Low credit score = rejection

Hard inquiries further reduce your score.

3. Heavy penalties

Bounce charges and late fees are high.

4. CIBIL impact

Missing even one EMI affects future loan eligibility.

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11. Which Option Saves You More Money?

Here’s a practical example comparing both loans.

Scenario: You need ₹1,00,000

Factor	Loan Against Insurance	Personal Loan
Interest rate	9%	15%
Tenure	2 years	2 years
Interest payable	Approx ₹9,450	Approx ₹16,700

You save ₹7,000+ simply by choosing the insurance-backed loan.

Multiply this across larger amounts or longer periods, and the savings are significant.

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12. Tax Impact on Both Loans

Loan Against Insurance

• Loan is not taxable

• Policy continues to enjoy tax benefits as long as it doesn’t lapse

• If policy is surrendered after taking a loan, tax might apply

Personal Loan

• Loan amount is not taxable

• You cannot claim tax deduction unless the loan was used for specific purposes like home improvement or business

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13. What Should You Choose? A Clear Recommendation

Here’s the simplest way to decide:

Choose Loan Against Insurance If:

• You have an LIC/traditional policy with a good surrender value

• You want the lowest possible interest rate

• You want minimal paperwork

• You don’t want your CIBIL to be affected

• You want flexible repayment

Choose Personal Loan If:

• You need a large amount beyond surrender value

• You want fixed EMIs

• You don’t have an eligible insurance policy

• You want to keep your insurance policy untouched

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14. Conclusion: A Smarter Way to Borrow

Both personal loans and loans against insurance serve different purposes, but if you have a life insurance policy with decent value, choosing a loan against it is often the smarter and more economical option.

It offers:

• Lower interest

• No CIBIL risk

• Faster processing

• Minimal documentation

• Continued policy benefits

Personal loans, while convenient, are expensive and risky for people with low credit scores or unstable income.

Ultimately, borrowing smart is always better than borrowing fast.
Understanding your options can save you money, protect your financial future, and help you handle emergencies without unnecessary stress.