Can you borrow against your life insurance policy in Nepal? Policy loan vs personal loan

A colleague needed Rs 3 lakh for a medical bill and had two things he could reach quickly: an endowment policy nine years into a twenty-year term, and a bank that would take a week. The agent who had sold him the policy told him to take the loan from the insurer instead. Same day, no valuation, no questions about what the money was for.

He took it. What nobody walked him through was the rate, or what happens to that rate every six months.

First, does your policy qualify

Two conditions, and both have to be true.

Section 10(1) of the Nepal Insurance Authority's जीवन बीमालेख सम्बन्धी निर्देशिका, २०७९ (Life Insurance Policy Directive 2079, issued under Section 166 of the Insurance Act 2079) allows an insurer to grant a loan against a policy only after three full years of premium have been received and three years have elapsed from the policy commencement date. The clause extends the same three-year wait to single-premium policies, which is the part people assume they can skip by paying everything up front.

This is the same threshold that governs surrendering a policy, and for the same underlying reason: before year three there is no surrender value, so there is nothing to lend against. A pure term plan never acquires one, so it never becomes loan-eligible. If you are holding a return-of-premium plan sold under a term label, check which you actually have before assuming either way.

Section 10(4) sets the size: a maximum of 90% of surrender value, and a minimum of Rs 1,000. Note what the ceiling is measured against. Not the sum assured, not the premiums you have paid, but the surrender value, which in the early years is a fraction of what you put in because the first two years' premiums largely funded agent commission.

The clause that disappeared in 2079

Here is the finding that explains the whole rate picture, and it is a comparison between two versions of the same directive.

The 2078 directive, at Section 10(7), said an insurer charging interest on a policy loan had to set the rate "not exceeding the interest rate prescribed by commercial banks prevailing in the market", with board approval. A ceiling, pegged to the banking market.

The 2079 directive that replaced it dropped that language entirely. What Section 10(5) now says is that the insurer may charge interest, and the rate "shall be as determined from time to time by the board of directors of the insurer." Board discretion, no reference point, no cap.

So when you compare an insurer's 12% against a bank's 8% and wonder how the regulated product ended up more expensive, the answer is that until 2079 it could not have been, and now it can.

What the rate actually is

Getting a straight answer here is harder than it should be, because most insurers do not publish one.

Two of those rows are direct from the insurer. Nepal Life's 10% has not moved since 2018, and MetLife Nepal's citizen charter states a loan of up to 90% of surrender value "at a compound interest rate of 12% per annum."

The 10-to-14% band deserves a caveat rather than a citation-and-move-on. It comes from the Professional Insurance Agents Association's submission describing what life companies charge, reported in February 2026. It is the agents' characterisation of industry practice, not a disclosure by any named insurer. LIC Nepal, National Life, SuryaJyoti, Asian Life and Himalayan Life publish loan terms without publishing a rate, so for most of the market the number is simply not public.

That opacity is itself worth knowing before you sign. Ask for the rate in writing, and ask whether it can change after disbursement.

Compounding every six months is the part that bites

The headline rate understates the cost, because of what happens to interest you do not pay.

Interest falls due every six months. If you pay it, the loan behaves like a simple-interest facility. If you do not, the interest converts into principal and starts earning interest itself. Trade press covering the mechanics puts it plainly: the policyholder ends up paying interest on the interest as well as the principal.

Run it on a Rs 3 lakh loan at 12%, compounding twice a year, with nothing paid along the way. The arithmetic below is mine, using standard compound interest at 6% per half-year:

Five years of silence turns Rs 3 lakh into more than Rs 5.37 lakh. The policy was supposed to be a savings vehicle. Left alone, the loan against it grows faster than almost anything the policy itself is credited with.

Where the same policy borrows cheaper

The thing most policyholders do not know is that a bank will lend against the identical asset.

Everest Bank runs a loan against life insurance policy at up to 90% of surrender value, the same ceiling the insurer applies, with a 10% margin. Its published rate sheet, effective 1 Bhadra 2083, lists 8.00% fixed, or base rate plus 1 to 3 points floating. With Everest's base rate at 4.31%, that floating band works out to roughly 5.31% to 7.31% by my arithmetic. The eligible insurer list covers Rastriya Beema Sansthan, National Life, LIC Nepal, MetLife ALICO and Nepal Life. Structure is either a demand loan or overdraft for up to a year, or a term loan up to five years or policy maturity.

Widen the lens and the policy loan looks worse still. A secured personal loan at Himalayan Bank runs 7.750% fixed. Rastriya Banijya Bank's personal loan is 8.00% fixed for five years, 8.50% for ten. If you hold a fixed deposit, borrowing against your own FD is cheaper than all of it: NRB's Unified Directive 2082 sets the rate floor at the deposit's own coupon rate and, at Directive 15 Section 8, bars the bank from charging any fee at all on a loan against your own FD receipt. The trade-offs across these are laid out in personal loan vs gold loan vs overdraft and loan against FD or shares.

For context on where all of this sits, NRB's annual data to mid-July 2026 puts the commercial bank average base rate at 4.83% and the weighted average lending rate at 6.55%, both down sharply from a year earlier. Rates across the banking system fell. The policy loan rate did not follow, because after 2079 nothing requires it to.

When the loan quietly kills the policy

This is the failure mode to understand before borrowing, not after.

MetLife Nepal's citizen charter states that the policy "will be auto-surrendered if the total indebtedness becomes equal to or higher than the total surrender value." Trade press describes the same outcome across the industry: once principal plus accumulated interest crosses the surrender value, the policy is forfeited and the holder receives no claim payment or service facility.

Put that next to the compounding table above and the risk becomes concrete. Borrow near the 90% ceiling, pay no interest, and the debt reaches the surrender value in a couple of years, faster if the surrender value is growing slowly. The cover your family was relying on ends without anyone sending a fresh warning. If you sized that cover using how much life insurance you actually need, a foreclosed policy blows a hole in the plan exactly where you assumed there was none.

One honest limit on this point. The Nepal Insurance Authority's Section 10 is silent on what happens when debt exceeds surrender value. The foreclosure rule is insurer practice and trade-press reporting, not a regulatory provision, so confirm the exact trigger in your own policy document.

The process, and the case for using it anyway

The speed is genuine and worth stating fairly. MetLife lists processing at three working days after complete document submission, and its fee is stated as none. Take the policy document, citizenship, a photo and your bank details to the branch. No appraisal, no salary verification, no stated purpose.

So a policy loan does win in narrow cases. A genuine emergency inside a week, where a bank cannot move fast enough. A short bridge you will clear within one or two interest cycles, before compounding matters. A borrower who would not qualify for an unsecured personal loan, or who is on a CIB blacklist and cannot borrow from a bank at all.

What it should not be is a multi-year borrowing. At 12% compounding semi-annually against a bank's 8% fixed on the same collateral, every year you carry the balance costs you real money for convenience you only needed on day one. If the loan is going to run for years, move it to the bank.

Two things the research could not settle, so treat them as open questions rather than assumptions. Whether an outstanding policy loan is deducted from a death claim has no published Nepali source, though deduction on the surrender side is documented, and the logic of the auto-surrender rule points the same way. The tax treatment of a policy loan has no IRD circular, no professional digest and no insurer page behind it. Borrowed money is not normally income, but nobody in Nepal has written that down for this product. If either matters to your decision, get your insurer's answer in writing.

What you actually need to know

1. The rate ceiling was deleted, and that is why the product is expensive. The 2078 directive capped policy-loan interest at prevailing commercial-bank rates. The 2079 directive replaced it with board discretion and no cap. Insurers now charge roughly 10 to 14% while the weighted average bank lending rate sits at 6.55%.
2. A bank will lend against the same policy for less. Everest Bank does it at 8.00% fixed, up to the same 90% of surrender value. Unless you need the money inside three days, the insurer is the expensive door to the same asset.
3. Unpaid interest compounds every six months, and can end the policy. Once the debt reaches the surrender value the policy is auto-surrendered and the cover is gone. Either service the interest each cycle or keep the loan well short of the ceiling.

Weighing a policy loan against a bank loan on a specific policy? Email parjanya57@gmail.com with the insurer, the years paid, the quoted surrender value and the rate you were offered, and I'll work the comparison with you.

This post is part of the Nepal Money Basics guide — the protection section.