Pledged your life insurance policy for a bank loan? NCDRC says lender can surrender it without consent

Taking a loan against a life insurance policy can provide access to funds without requiring the policyholder to sell the investment. But what happens to the policy if the loan is not repaid?

A recent order by the National Consumer Disputes Redressal Commission (NCDRC) has clarified an important aspect of such arrangements: when a life insurance policy has been assigned to a bank as security for a loan, the insurer can act on the bank's instructions to surrender the policy without obtaining separate consent from, or issuing a separate notice to, the original policyholder.

The ruling came in a case involving Amar Singh, a resident of Kharkhoda in Sonepat, Haryana, and his LIC policy.

What happened to the LIC policy?

Singh purchased a life insurance policy from LIC of India on December 28, 2001, with a sum assured of ₹5 lakh and maturity scheduled for December 8, 2026.

He later obtained a ₹79,000 credit limit from IDBI Bank, using the LIC policy as security.

According to the case record, Singh continued paying his premiums. However, on October 5, 2011, LIC surrendered the policy for ₹2,26,325 and transferred the amount to the bank.

Singh said he had neither requested nor consented to the surrender. He approached the District Consumer Disputes Redressal Commission, Sonepat, seeking restoration of the policy.

District and State consumer commissions gave different rulings

The District Commission ruled in Singh's favour in February 2015. It directed LIC to reinstate the policy from the date of surrender and accept the outstanding premiums with interest.

It also directed the bank to refund ₹2,26,325 to LIC, along with 9% interest from October 5, 2011, and pay ₹10,000 towards mental agony and litigation costs.

LIC challenged the decision before the State Consumer Disputes Redressal Commission, Haryana.

In September 2016, the State Commission set aside the order against LIC, holding that following assignment of the policy, the bank exercised control over it and LIC was not required to issue a separate notice to Singh.

Singh subsequently approached the NCDRC.

What did the NCDRC say?

Singh's counsel argued that LIC had campaigns for revival of lapsed policies and pointed to a November 15, 2011 letter from the bank stating that it had no objection if the insurer continued the policy. LIC, however, did not renew it.

LIC argued that this was not a case involving a lapsed policy caused by non-payment of premiums. Instead, it was a surrender by the duly appointed assignee, after Singh had assigned all rights in the policy to the bank through a December 6, 2007 assignment letter.

In its August 2, 2026 order, the NCDRC observed: "It is undisputed that the complainant had duly assigned the policy to the bank which surrendered the same as the loan was not paid by the complainant. The insurance company acting on the basis of the assignment and the request of the assignee, both, calculated the surrender value as on date and duly sent the amount outstanding on the policy".

The Commission further said: "we are of the view that there is no deficiency of service on the part of the insurance company and they have acted as per the rules and procedure".

What happened to the ₹2.26 lakh?

The NCDRC did, however, direct IDBI Bank to release ₹2,26,325.

The amount had remained in the bank's suspense account because Singh had closed his accounts before the cheque could be encashed.

The bank was directed to release the money, along with accrued interest, within one month. If it failed to do so, it would have to pay 6% interest per annum on the outstanding amount.

What should policyholders know?

The case highlights the significance of assigning an insurance policy as loan security.

Once a policy is assigned to a bank, the lender can exercise rights attached to that assignment. In this case, the NCDRC held that LIC was entitled to act on the assignee bank's request without separately obtaining Singh's consent.

Singh's policy, purchased in 2001 with a ₹5 lakh sum assured and maturity in December 2026, was surrendered in 2011 for ₹2,26,325.

The order underscores the need for policyholders to understand the terms of an assignment before using a life insurance policy as collateral for a loan.