Understanding a product and assessing its suitability improve the chances of staying invested.
Use life insurance mainly to cover risk, not to seek returns.
Key Points
- Life insurers paid nearly as much for policy surrenders and withdrawals as maturity claims, highlighting growing premature exits.
- Mis-selling, unsuitable products, unaffordable premiums and weak investment performance are among the leading reasons policyholders surrender insurance plans.
- Traditional life insurance policies often result in significant losses on early surrender, while Ulips have a five-year lock-in period.
- Experts recommend buying life insurance primarily for financial protection through term plans instead of chasing investment returns.
- Buyers should verify premium commitments, understand liquidity restrictions and seek independent advice before purchasing any insurance policy.
Life insurers are paying out almost as much to customers who abandon their policies as to those who see them through.
According to the Reserve Bank of India's Financial Stability Report, surrenders and withdrawals accounted for 38.3 per cent of payouts in 2025-2026, against 36.9 per cent for maturity claims.
The narrow gap points to premature exits becoming a widespread phenomenon.
Why policyholders exit early
Most early exits are from traditional policies.
"Policyholders sometimes conclude after purchase that these policies offer little value," says Renu Maheshwari, Sebi-registered investment advisor, co-founder and principal advisor, Finscholarz Wealth Managers.
Awareness of mis-selling sometimes prompts buyers to drop unsuitable policies. Agents may present a multi-year premium policy as a single-premium product.
"A buyer may be told that they need to pay a large premium only once. When asked to pay the same amount again the following year, they may surrender the policy," says Deepesh Raghaw, Sebi-registered investment advisor, PersonalFinancePlan.
Buyers may also exit when a product, particularly a Ulip, performs poorly.
Early exits are costly
A traditional policy may yield nothing if it lapses before two premiums have been paid.
"The buyer may receive only a portion of the premiums paid even after holding a traditional policy for five or seven years," says Raghaw.
Ulips have a five-year lock-in but usually offer a less painful exit.
"If a policyholder exits a Ulip before the lock-in ends, the proceeds are transferred to a low-return fund (the discontinued policy fund, which pays a minimum guaranteed return of 4 per cent per annum). The proceeds can be redeemed after five years," says Maheshwari.
Match product to needs
Understanding a product and assessing its suitability improve the chances of staying invested. Use life insurance mainly to cover risk, not to seek returns.
Term insurance is the main product most people need, especially when dependants rely on the buyer's income.
Those seeking attractive long-term returns should avoid traditional plans. They may offer inadequate protection compared with term insurance.
They invest primarily in fixed income, which locks buyers into low returns for years. Ulips permit tax-free switching between debt and equity.
However, investors cannot withdraw during the first five years, even if the funds perform poorly. Buyers who do not need life cover must still bear mortality charges.
These charges can absorb a substantial part of an elderly buyer's premium.
Deferred annuities are generally unsuitable for rapid, long-term corpus growth. Immediate annuities can provide lifelong retirement income and may be useful when bought during a high-interest-rate period.
Check premium affordability
Buyers should ensure that premiums remain affordable throughout the tenure by comparing them with their regular cash flows. Avoid rushed purchases during the tax-saving season. "Do not purchase a policy merely because of tax benefits or a persuasive sales pitch," says Aditya Mall, appointed actuary, Generali Central Life Insurance.
Policyholders facing affordability issues should get a cost-benefit analysis done.
"The analysis should compare continuing the policy with reinvesting the surrender value and future premiums," says Maheshwari.
Verify premium structure
Confirm whether the policy requires a single premium or recurring payments. Higher commissions on regular-premium plans may encourage mis-selling.
The policy document states the premium structure on its first couple of pages.
Understand liquidity restrictions
Be aware of a product's lock-in. "Maintain a separate emergency fund for short-term liquidity needs," says Mall. Do not assume that money in an insurance product will be accessible whenever required.
Protect yourself from mis-selling Seek professional advice if you cannot evaluate a product independently. Prefer a fee-charging adviser to one who earns product commissions.
"Do not purchase a policy under pressure or merely to meet a tax deadline," says Mall.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Aslam Hunani/Rediff
