A loan against ULIP offers policyholders a way to access funds without surrendering their long-term insurance and investment plan. Since ULIPs combine life cover with market-linked returns, they accumulate a fund value over time. Once this value crosses the minimum threshold specified by the insurer, borrowers can pledge it to obtain a loan. While this option provides convenience and quick liquidity, it also carries risks tied to market fluctuations, fund performance, and policy conditions. Understanding both the advantages and potential drawbacks of taking a loan against ULIP policy helps borrowers make informed decisions and avoid disruptions to their long-term goals.
Understanding how a loan against ULIP works
A loan against ULIP is available only after the policy completes the mandatory lock-in period, usually five years. After this point, the policy accumulates fund value, which becomes the basis for the loan amount. The insurer sets a loan-to-value ratio, allowing borrowers to access a percentage of the available fund value. Interest is charged on the borrowed amount until repayment. If the borrower defaults or delays repayment, the insurer may adjust outstanding dues against the fund value. Since the loan is secured by a market-linked policy, fund performance directly influences loan safety and sustainability.
Key benefits of taking a loan against ULIP
Taking a loan against ULIP policy offers several advantages that appeal to individuals seeking liquidity without disturbing their financial plan.
1. Retains insurance cover
Unlike surrendering the policy, borrowing against it allows policyholders to maintain life cover. This ensures continued financial protection for family members while accessing funds for urgent needs.
2. No need to liquidate market-linked investments
Selling ULIP units during market lows can lead to losses. A loan helps avoid premature liquidation, enabling the investment to continue compounding while temporarily unlocking cash flow.
3. Lower interest rate compared to unsecured loans
Because the fund value acts as collateral, the interest rate is often more competitive than personal loan rates. This makes a loan against ULIP an appealing option for short-term financing.
4. Faster approval due to limited documentation
Since insurers already hold policyholder details, the documentation required is minimal. This reduces processing time and allows quicker access to funds.
5. Flexible repayment options
Borrowers can repay the loan in instalments or lump sums, depending on the insurer’s rules. Flexibility helps borrowers match repayments to their income pattern.
Major risks and considerations
Although a loan against ULIP policy offers benefits, it also carries risks that borrowers must evaluate carefully.
1. Market fluctuations affect loan security
ULIPs invest in equity, debt, or hybrid funds. A sharp drop in fund value can reduce the collateral available for the loan. If the fund value falls below the minimum threshold, the insurer may issue a margin call or adjust the loan from the policy fund.
2. Non-repayment may lead to policy termination
Failure to repay interest or outstanding loan amounts may cause the insurer to cancel the policy. This results in loss of both investment and life cover, a risk many policyholders overlook.
3. Loan availability only after lock-in
Borrowers cannot access a loan against ULIP during the initial lock-in period. Those who need liquidity sooner will have to consider alternative financing options.
4. Reduction in fund value impacts long-term goals
Even if the loan does not immediately disrupt ULIP performance, interest charges reduce overall returns. Borrowers aiming for long-term wealth accumulation may see slower growth if the loan remains outstanding for extended periods.
5. Policy charges continue during loan tenure
ULIPs include premium allocation charges, fund management charges, mortality charges, and more. These deductions continue regardless of the loan amount taken, which can further reduce the fund value.
Eligibility criteria for a loan against ULIP
Eligibility depends on insurer guidelines but usually requires:
- Completion of the mandatory lock-in period
- Adequate fund value to meet minimum collateral requirements
- Active policy status with regular premium payments
- Compliance with loan-to-value ratios set by the insurer
Borrowers should verify whether their specific ULIP policy supports loan features, as not all plans provide the option.
When a loan against ULIP is a practical choice
This type of loan is suitable if:
- You need short-term liquidity and do not want to disrupt your ULIP returns
- You want to avoid high-interest unsecured borrowing
- Your fund value is stable, and you can comfortably manage repayments
- You want to keep your insurance cover active while accessing funds
Borrowers must assess whether the loan aligns with their investment objectives and risk appetite.
How to minimise risks when taking a loan against ULIP
Borrowers can reduce potential risks by:
- Monitoring fund value regularly
- Repaying interest promptly to avoid compounding
- Avoiding borrowing close to market downturns
- Ensuring premiums continue without interruption
- Keeping the loan amount conservative and well within the fund value
These practices help protect both the ULIP’s long-term performance and the borrower’s financial stability.
Final thoughts
A loan against ULIP can be a valuable source of liquidity, but it must be approached with a clear understanding of its risks and benefits. While it allows policyholders to retain life cover and preserve market-linked investments, it introduces exposure to market volatility, repayment responsibilities, and potential policy impacts. Evaluating fund stability, repayment capacity, and long-term goals is essential before borrowing. With thoughtful planning, borrowers can use a loan against ULIP policy effectively while safeguarding their investment and insurance protection.
