IRDAI Makes a Policy Loan Facility Mandatory in Every Life Insurance Savings Plan for Liquidity

For decades, a life insurance policyholder who needed cash mid-term had two blunt choices: surrender the plan and swallow the loss, or let it lapse. The IRDAI Master Circular on Life Insurance Products, issued in June 2024 under the IRDAI (Insurance Products) Regulations, 2024, closes that trap. It makes a policy loan facility mandatory in every savings-oriented life insurance product, alongside a plain-language Customer Information Sheet (CIS) and a free-look window enhanced to 30 days. The circular also consolidates and repeals a stack of earlier product circulars, so the loan right is now a single, non-negotiable feature rather than an insurer's discretionary favour.

This deep dive walks through exactly what the rule says, why the liquidity guarantee changes the maths of owning an endowment or money-back plan, and where the fine print still bites.

The Rule / Product

The IRDAI (Insurance Products) Regulations, 2024 were notified on 20 March 2024, and the accompanying Master Circular on Life Insurance Products followed in June 2024 to operationalise them. The circular applies to all life insurers registered under the Insurance Act, 1938, and governs the design of participating, non-participating, and linked savings products.

Three structural changes matter most for a policyholder's liquidity:

• Mandatory policy loan. Every life insurance product that has a savings element must offer a policy loan facility once the policy acquires a surrender value. Before June 2024, offering loans was left to the insurer's product design; now it is a compulsory feature the regulator requires in the file-and-use approval.
• Customer Information Sheet (CIS). Insurers must hand over a standardised CIS that sets out the sum assured, premium, term, surrender values, exclusions, and the loan facility in simple language, so a buyer can see the liquidity terms before signing.
• Free-look period of 30 days. The window to review documents and exit with a refund has been standardised at 30 days for all policies, doubling the earlier 15-day norm. The mechanics are covered in our free-look period glossary entry.

The circular consolidates earlier product-specific circulars into one master document, which is why insurers refreshed their entire savings portfolio through 2024. The full text is on the regulator's site (see irdai.gov.in).

Why It Matters

The practical significance is that a policyholder facing a cash crunch in 2026 no longer has to destroy years of compounding to raise money. A policy loan lets the cover, the bonuses, and the maturity benefit stay intact while the insurer advances cash against the built-up surrender value. Surrendering, by contrast, is irreversible and typically pays out far less than the premiums put in during the early years.

Consider the difference in what stays alive. When you surrender a plan after, say, five years of a 20-year term, you crystallise the loss on early-year charges and the sum assured protection for your family disappears. When you take a policy loan instead, the death benefit continues (subject to the outstanding loan being adjusted from any claim), the participating bonuses keep accruing, and you repay on your own schedule. For a family that has been paying Rs 50,000 a year into an endowment plan, that distinction can be worth several lakh over the remaining term.

The 30-day free-look period matters for a different reason. It gives a buyer a full month, up from 15 days, to read the new CIS, cross-check the illustrated surrender and loan values, and walk away with a refund of premium (less proportionate risk-cover charges and stamp duty) if the plan is mis-sold. That is a meaningful consumer-protection upgrade for a product class where mis-selling complaints have historically been high.

The liquidity guarantee also reshapes how a savings plan sits in a household's wider financial plan. Because the accumulated value can now be tapped without collapsing the policy, an endowment or money-back plan doubles as a standby credit line, reducing the temptation to raid a health or emergency fund. If you are still deciding whether a bundled savings plan is the right vehicle at all, compare the pure-protection route using our health insurance premium calculator for the risk-cover side of the ledger before committing 20 years of premium to a single product.

Worked Numbers

Take a participating endowment plan with a sum assured of Rs 10,00,000, an annual premium of Rs 50,000, and a 20-year term. The policyholder has paid five full years of premium, a total of Rs 2,50,000, and the plan has acquired a surrender value. Loan terms are set by each insurer within the circular's framework, so the figures below are illustrative; always read your own CIS for the exact percentages.

Assume the acquired surrender value at the end of year five is Rs 1,60,000, and the insurer advances a policy loan of up to 85% of that surrender value at an interest rate of 9% per annum (a common band; verify your policy's rate).

If the policyholder borrows the full Rs 1,36,000 and repays it after one year, the cost is roughly Rs 12,240 in interest, and the Rs 10,00,000 cover plus all accrued bonuses remain fully in force. Had the same person surrendered, they would have received only the Rs 1,60,000 surrender value, lost the Rs 10,00,000 protection, and forfeited every future bonus and the maturity benefit.

It is worth benchmarking that 9% policy-loan rate against the alternatives. An unsecured personal loan in 2026 typically carries 11% to 18% per annum and demands fixed monthly EMIs, while a credit-card revolve can run past 36% per annum. The policy loan, secured against your own surrender value, usually sits at the lower end and lets you choose when to repay, which is precisely why the regulator wanted it available as a liquidity backstop. The trade-off is that the borrowing reduces what the policy will ultimately pay until you clear it.

The tax position of the loan itself is favourable: a policy loan is borrowing, not income, so it is not taxable in the year you draw it. The premium you continue to pay may still qualify for deduction under Section 80C up to Rs 1,50,000 a year, but only under the old tax regime (the new regime does not allow the 80C life-insurance deduction). The rules are set out on the tax department's portal (incometax.gov.in). Death and maturity benefits stay exempt under Section 10(10D) subject to the premium-to-sum-assured conditions; for traditional non-linked policies issued on or after 1 April 2023, maturity proceeds are taxable if the aggregate annual premium across policies exceeds Rs 5,00,000.

To model the cost of protection separately from the savings leg, our term insurance premium calculator and the ULIP vs mutual fund calculator let you compare a pure-risk-plus-loan approach against a bundled savings plan before you lock in.

Pitfalls

The mandatory loan facility is a genuine upgrade, but it is not free money, and the 2024 circular does not remove the old wording traps. Watch for these.

Interest compounds, and unpaid interest is capitalised. Policy-loan interest, often billed half-yearly, is added to the outstanding principal if you do not pay it. On the Rs 1,36,000 example above at 9%, an untouched loan grows past Rs 1,48,000 within a year once interest is capitalised. Let it run and the debt can approach the surrender value.

The loan is capped, not the full surrender value. Because insurers typically lend a percentage (commonly 80% to 90%) of the surrender value rather than 100%, you cannot pull out everything the policy is worth. If you needed the full Rs 1,60,000 in the worked example, a loan of Rs 1,36,000 leaves a Rs 24,000 gap.

Outstanding loan is netted off every claim. If the life assured dies with a loan running, the insurer deducts the principal plus accrued interest from the Rs 10,00,000 death benefit before paying the nominee. A large loan quietly erodes the very protection the policy exists to provide.

No surrender value, no loan. The mandate only bites once the policy has acquired a surrender value. A plan surrendered or approached for a loan in its first year, before any value has built up, may have nothing to lend against, which is why the CIS surrender-value table is worth reading during the 30-day free-look window.

Free-look refunds are net, not gross. Exiting within 30 days refunds the premium less proportionate mortality charges for the days on cover, plus stamp duty and any medical-examination cost. It is not a full money-back guarantee, so read the CIS deduction line.

The old wording traps still apply to the risk cover. Suicide within 12 months of commencement or revival, non-disclosure of a pre-existing condition, and lapse before surrender value is acquired can all reduce or void a payout, entirely separate from the loan feature.

FAQ

Is the policy loan facility mandatory on every life insurance policy?

It is mandatory on every savings-oriented life product once the policy acquires a surrender value, under the IRDAI Master Circular on Life Insurance Products issued in June 2024. Pure-protection term plans that build no surrender value are outside this liquidity mandate, because there is no accumulated value to lend against.

How much can I borrow against my policy?

Insurers lend a percentage of the acquired surrender value, commonly in the 80% to 90% band, with the exact figure set out in your Customer Information Sheet. On an illustrative Rs 1,60,000 surrender value at 85%, that is Rs 1,36,000. You cannot borrow against a policy that has not yet acquired a surrender value.

Will taking a policy loan reduce my life cover?

The cover stays fully in force while the loan runs, but any outstanding principal plus accrued interest is deducted from the death or maturity benefit at the time of the claim. On a Rs 10,00,000 sum assured with a Rs 1,36,000 loan outstanding, the nominee would receive the balance after the insurer recovers the loan.

Is a policy loan taxable?

No. A loan against your policy is borrowing, not income, so it is not taxable in the year you draw it, per the tax rules at incometax.gov.in. Your continuing premium may still qualify for a Section 80C deduction of up to Rs 1,50,000 a year, but only under the old tax regime.

What is the free-look period now?

The IRDAI Master Circular standardised the free-look period at 30 days for all policies, up from the earlier 15 days. Within this window you can return the policy and receive the premium back, less proportionate risk charges, stamp duty, and any medical costs.

What is the Customer Information Sheet?

The CIS is a standardised, plain-language document the insurer must give you, summarising the sum assured, premium, term, surrender values, exclusions, and the loan facility. It is designed so you can verify the liquidity and exit terms during the 30-day free-look period before the policy becomes binding.

Should I take a policy loan or surrender the plan?

If you need cash but want to keep your family's cover and future maturity benefit, a policy loan is usually the better route, because surrender is irreversible and forfeits the sum assured and all future bonuses. Model both against a pure-term-plus-investment alternative using the calculators linked above before deciding.