Loan against LIC policy: Can bank surrender your policy without informing you? NCDRC decides

After pledging your life insurance policy as collateral for a bank loan, you may assume that the insurer will at least inform you before the policy is surrendered. However, the National Consumer Disputes Redressal Commission (NCDRC) has recently ruled that it will not. Once a policy is assigned to a bank as security, the bank may surrender it without the policyholder's consent or notice to recover its outstanding dues.

Singh was regularly paying premiums. But on October 5, 2011, LIC surrendered the policy for ₹2,26,325 without his consent and sent the amount to the bank.

Singh said he had never expressed any intention or consent to surrender the policy and asked LIC to restore the policy. When the policy was not restored, he filed a complaint before the District Consumer Disputes Redressal Commission, Sonepat.

The District Commission ruled in Singh's favour on February 4, 2015, directing LIC to reinstate the policy to its original number from the date of surrender and accept premiums with interest for the defaulted period. It also directed the bank to refund ₹2,26,325 to LIC and pay 9% interest on that amount from October 5, 2011, along with ₹10,000 for mental agony and litigation costs .

However, LIC appealed to the State Consumer Disputes Redressal Commission, Haryana. The State Commission, on September 21, 2016, set aside the District Commission's order against LIC, holding that after assignment, the bank exercised control over the policy and LIC was not required to issue any separate notice to the complainant.

Singh then filed a revision petition before the NCDRC. His counsel argued that LIC itself had a campaign for revival of lapsed policies allowing renewal within five years, and that the bank had issued a letter on November 15, 2011 stating it had no objection if the insurance company continued the policy. But LIC declined to renew it.

The insurer countered Singh's argument saying this was not a case of a lapsed policy, which occurs due to non-payment of premium, but a case of surrender by a duly appointed assignee. The complainant had assigned all rights in the policy to the bank through a letter of assignment dated December 6, 2007. And the bank surrendered the policy due to non-payment of the loan.

In its order dated August 2, 2026, 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".

The bank's counsel told NCDRC that the assignment of the LIC policy was effected under Section 5 of the SARFAESI Act, 2002, which recognises the right of a secured creditor to assign its financial assets. Citing Supreme Court rulings in ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd., the counsel said that "assignment of debts by a financial institution does not require the consent of the borrower" and that "the assignment in favour of bank was lawful and valid".

The NCDRC, however, directed IDBI Bank to release ₹2,26,325, which had been lying in its suspense account because Singh had closed his accounts with the bank before the cheque could be encashed. The bank was told to release the amount with accrued interest within one month, failing which it would pay 6% interest per annum on the outstanding sum.

Lesson for policyholders

Singh's case highlights a reality many policyholders may not be aware of.

When a policy is assigned to a bank as loan security, the policyholder effectively transfers control over it. The insurer is not obligated to inform the original policyholder before acting on the assignee's instructions, according to the NCDRC order. Further, even if the loan is cleared, once the policy has been surrendered, the insurer is under no obligation to reinstate it.

Singh's policy, taken in 2001 with a maturity date of December 2026, was surrendered in 2011 for just ₹2,26,325, less than half the sum assured, and cannot be revived.