Now, you cannot repay loan taken against insurance policy using credit card

"This could give rise to opportunities for availing short-term (1 month) interest-free loans. However, the interest rates on default of repayment of credit cards are very high and in case the customer fails or delays payment of credit cards, this could put the customer under huge financial exposure. In order to discourage tendencies to use credit card for the purposes and to prevent policyholders' vulnerability to financial delinquencies, repayment of policy loans through credit cards has been prohibited," Baradhwaj told CNBC-TV18.com.

Life insurance policies can be used to raise loans if policyholders find themselves stuck in the middle of financial crunch. These can be availed by pledging specific traditional policies like money back and endowment policies.

Such plans have a life cover option in addition to the saving factor which makes them acceptable to banks. It is important to understand that unit-linked insurance plans and term insurance are not accepted as collateral. The surrender value should be acquired by the plan only if the policyholder gains eligibility or the loan.

This feature is valuable for customers who are looking for financial assistance or if they are facing any liquidity crunch.

According to BankBazaar, LIC apart, several other life insurers such as Edelweiss Tokio Life and ICICI Prudential Life in addition to many other banks including HDFC Bank, ICICI Bank and the State Bank of India grant loans to customers against insurance policies.

The repayment procedure and interest rates differs based on the bank or lender from whom the policy holder wishes to take out the loan. The interest rates, however, are comparatively lower than those charged by banks for secured loans. They are also considerably lower than rates associated with personal loans.

Normally, the amount granted by insurers is 85 percent to 90 percent of the surrender value.