NEW DELHI : The Reserve Bank of India in its recent Financial Stability Report highlighted that insurance sector continues to display balance sheet resilience with the solvency ratio of life insurers remaining above the minimum threshold. The RBI report however commented that surrenders and withdrawals have risen sharply, accounting for approximately 38.3 percent of total pay-outs in 2025-26, going beyond maturity benefits which stood at 36.9 per cent.
Death claims have normalised to around 8.1 percent. The near parity between surrenders and maturity pay-outs indicates that policyholders are increasingly exiting policies prematurely.
“This shift has direct implications for asset-liability management (ALM), as early exits disrupt the long-duration assumptions underpinning life insurance investment strategies and can force asset liquidation ahead of schedule. Persistently elevated surrender rates also signal policyholder dissatisfaction, product mis-selling, or competitive pressure from alternative financial instruments,” said RBI.
Nochiketa Dixit, Managing Director – Industries, EDME Insurance Brokers Ltd in a candid conversation with Zee News highlighted various reasons involving mid-way exits of policies and the impact on policy holders.
1. Why are mid-way exits causing financial losses for policyholders?
Policy surrenders are climbing, and it’s worth explaining why the loss is so steep. In the early years, a large part of every premium goes toward the cost of setting up the policy, distribution, underwriting and issuing it, so very little of what you pay actually builds up value in those first few years. That is why the surrender value you get back is usually much lower than the total premiums you have put in. On top of that, the cover you already paid for during those years is gone too, it cannot be recovered once the policy is surrendered.
There is a tax cost hiding in this as well, many people forget that the tax benefits they claimed on those premiums over the years can come back to bite them if the policy is surrendered too early, the exemption is meant for people who stay invested for the long term, not for early exits. And if you try to buy fresh cover later, you are older, possibly with new health issues, so the same cover now costs more, sometimes a lot more, or you may not get it at all. So an early exit does not just cost money today, it makes protecting your family more expensive going forward.
2. How can a buyer calculate their exact breakeven point before surrendering a policy?
Before surrendering, it helps to look at four things together rather than just the cash in hand. Compare what you would get today against the total premiums you have already paid. Then look at what you would still need to pay if you continued, against the maturity or death benefit you would be giving up. The tax angle deserves careful attention here, because it can swing the decision either way.
Maturity proceeds on a life insurance policy are usually tax free, but only if the policy meets certain conditions on how much premium you pay relative to the cover you hold, and for some policies, especially unit linked ones, premiums above a certain limit each year lose that tax free status altogether. Surrendering early can also mean losing exemptions you already claimed in earlier years, so the tax saved is not always the tax kept.
Finally, price out what the same amount of life cover would cost you today if you had to buy it fresh. Once you see all four side by side, including the tax piece, surrendering often turns out to be the costliest option. Converting the policy to a paid up plan, or taking a loan against it, usually works out better than cashing out entirely, and both keep your original tax benefits intact.
3. What are the red flags regarding mis-selling of life insurance policy?
None of this matters though if the policy was wrong from the start. Mis-selling often begins right at the point of purchase. The clearest warning sign is when a policy is pitched mainly on the returns it will give rather than the protection it provides, promises of guaranteed profits or quick doubling of money should make anyone pause, because that is simply not how insurance is priced.
Sometimes tax saving itself becomes the pitch, with buyers told only about the deduction they will get and never told about the lock in period or what happens to that tax benefit if they exit early. Other red flags include a policy being sold as a short term investment when it is really a long term product, or the surrender charges never being properly explained upfront. If a buyer feels unsure about what they signed up for, the free look period gives a window to walk away, and it is worth using rather than ignoring.
4. Families are surrendering policies for immediate cash or moving to alternative assets. How to build a portfolio that provides liquidity without sacrificing core life coverage?
If you need cash, insurance was probably never the right tool for that in the first place. Insurance is meant to protect your family’s future, not to sit there as a source of quick money, and treating it that way often means giving up tax benefits that took years to build.
Liquidity should come from elsewhere, an emergency fund, a savings account, or other investments that are easy to access without penalty and without any tax complications attached. The simplest approach is to keep pure protection, meaning term insurance, completely separate from your savings and investments.
Term cover costs very little for the amount of protection it gives, which leaves more of your money free to go into instruments that are actually built to be liquid. Build your emergency fund as its own separate bucket, let the life cover run quietly in the background with its tax benefits intact, and the two will rarely compete with each other.
