Used LIC policy as collateral for a loan? Know what the lender can do if you fail to repay the outstanding dues

If you have taken a loan against a life insurance policy, you may assume that the insurer cannot surrender the policy without your consent. A recent ruling of the National Consumer Disputes Redressal Commission (NCDRC), however, highlights why policyholders need to understand the legal effect of assigning a policy to a bank as loan security.

According to a report by Upstox, the NCDRC, in an order dated August 2, 2026, held that there was no deficiency in service on the part of Life Insurance Corporation of India (LIC) after it surrendered a policy on the instructions of the bank to which the policy had been assigned.

The case involved Amar Singh, a resident of Kharkhoda in Sonepat, Haryana. Singh had purchased a LIC life insurance policy on December 28, 2001, with a sum assured of ₹5 lakh and a maturity date of December 8, 2026, according to the report.

He later obtained a credit limit of ₹79,000 from IDBI Bank against the security of the policy. Singh assigned the policy to the bank on December 6, 2007.

LIC surrendered policy for ₹2.26 lakh

Singh continued paying premiums, but LIC surrendered the policy on October 5, 2011, for ₹2,26,325 and sent the amount to IDBI Bank, the report said.

Singh disputed the surrender, arguing that he had neither consented to nor requested it. He sought restoration of the policy. When LIC did not restore it, he approached the District Consumer Disputes Redressal Commission in Sonepat.

The District Commission ruled in Singh's favour on February 4, 2015. It directed LIC to reinstate the policy and accept premiums with interest for the period of default. It also directed the bank to refund ₹2,26,325 to LIC, with 9% annual interest from October 5, 2011, besides ₹10,000 towards mental agony and litigation costs, according to Upstox.

LIC challenged the decision before the Haryana State Consumer Disputes Redressal Commission. On September 21, 2016, the State Commission set aside the District Commission's order against LIC.

The State Commission held that once the policy had been assigned to the bank, the bank exercised control over the policy and LIC was not required to issue a separate notice to Singh before acting on the bank's instructions.

Singh subsequently approached the NCDRC.

What did NCDRC say about the policy assignment?

Singh's counsel argued before the NCDRC that LIC had a campaign for revival of lapsed policies and that the bank had subsequently issued a letter stating that it had no objection if the insurer continued the policy.

LIC, however, argued that the matter did not involve a lapsed policy. Instead, the policy had been surrendered by the duly appointed assignee, the bank, because the loan had not been repaid.

According to the report, the Commission noted that Singh had duly assigned the policy to the bank and that the bank surrendered it because the loan remained unpaid.

The NCDRC concluded that LIC had acted on the basis of the assignment and the request of the assignee. It calculated the surrender value and sent the amount outstanding on the policy. The Commission consequently held that there was no deficiency of service on LIC's part and that the insurer had acted according to the applicable rules and procedure, according to the report.

NCDRC directs IDBI Bank to release ₹2.26 lakh

Although the NCDRC did not find LIC deficient, the matter did not end with the surrender of the policy.

According to the report, IDBI Bank told the NCDRC that the ₹2,26,325 had remained in its suspense account. Singh had closed his accounts with the bank before the cheque could be encashed.

The NCDRC directed IDBI Bank to release ₹2,26,325 to Singh along with the accrued interest within one month. If the bank failed to release the amount within that period, it would have to pay interest at 6% per annum on the outstanding amount, according to the report.

The case highlights the importance of understanding what happens when a life insurance policy is assigned to a lender as security for a loan.

A policyholder who assigns the policy to a bank may no longer retain unrestricted control over the policy. Where the assignment is valid and recognised by the insurer, the assignee can exercise rights under the policy in accordance with the law and the terms of the assignment.