India's Life Insurance: Savings Trap Revealed

New data indicates that Indian life insurance policies are increasingly leading to early exits, resulting in substantial losses for households. In FY25, early surrenders and withdrawals accounted for approximately 37% of all life insurance payouts, a figure higher than maturity claims for the first time. This trend suggests that products intended to provide financial security are instead diminishing household savings.

The structure of life insurance policies often leads to a mismatch between customer expectations and reality. Surrender values are minimal in the initial years; for instance, policies surrendered in the first year often return nothing, and even by the fourth to seventh year, policyholders may only recover about half of their premiums.

Incentives, such as high first-year commissions, contribute to aggressive selling practices, often pitching life insurance as a replacement for fixed deposits or an alternative to mutual funds, without adequately explaining liquidity differences. Consequently, persistency ratios are alarmingly low, with over one-third of policies lapsing after the first year and nearly half not surviving beyond five years.

These early surrenders represent significant erosion of savings intended for crucial life goals like education or retirement. Regulatory measures like need-based selling exist, but their effectiveness is questionable, with comprehension often lacking. Experts advocate for overhauling surrender value rules and ensuring genuine understanding of policy terms before sale to rebuild trust in the insurance ecosystem.