Life Insurance: Why Do People Surrender Their Policies? Financial Needs or Mis-selling
A few days ago, Congress president Mallikarjun Kharge targeted the Narendra Modi government over skyrocketing inflation and unemployment, leading many people to surrender their life insurance policies. A survey by Deloitte and SBI Life Insurance mentioned that as many as 47% of policyholders surrender their life insurance policies due to budgetary constraints and the need for funds. However, one primary reason the study did not mention is the mis-selling of insurance policies which makes policyholders either surrender the policy and suffer losses or stop paying premiums to let the policy lapse.
For example, Life Insurance Corporation of India (LIC)'s Jeevan Saral used to be a hot-selling insurance product for agents until it was withdrawn when it turned highly controversial because of gross mis-selling and exaggerated claims about returns and benefits. In fact, Jeevan Saral was a traditional product that could make your premium (money paid) disappear! (Read: Will LIC Be Made To Pay for the Horrible Mis-selling of Jeevan Saral?) But more about Jeevan Saral and Moneylife Foundation's fight for policyholders later.
The SBI Life Financial Immunity Study 3.0 reveals that a staggering 47% of consumers had surrendered or not renewed their policies during the past five years. "Despite the undeniable significance of insurance, nearly 50% of consumers revealed a tendency to prematurely surrender their policies, despite the intended long-term nature of such commitments. Another crucial driver behind this phenomenon is the sudden need for funds. Consumers often choose to surrender their policies to reduce premium expenses when faced with an urgent need for liquidity. During our consumer study, it was observed that almost a fifth of the consumers chose to surrender their insurance policies due to urgent financial requirements."
While insurance is considered a non-discretionary expense, the study says, consumers often perceive it as discretionary when faced with immediate financial constraints. It says, "The decision to let go of policies and premiums for short-term cash needs is a concerning trend, which has ramifications on consumers' future financial well-being."
"Experts highlight that the COVID-19 pandemic placed significant strains on consumers' financial positions across segments of the society. Enhancing consumer education on the potential benefits of alternative options, such as borrowing against an insurance policy, could have helped prevent policy surrender under such circumstances," the study added.
According to Mahesh K Sharma, managing director and chief executive officer (MD&CEO) of SBI Life Insurance, one recurring misconception is the inclination to replace insurance with other financial instruments. "Surrendering insurance policies for immediate liquidity of short-term gains is a common yet misguided decision," he says.
The Financial Immunity Study 3.0, titled 'Demystifying the Consumer's Illusions', surveyed 5,000 respondents across 41 cities in India. As per the survey, almost 83% of insured individuals acknowledge the critical role of insurance in attaining financial resilience. However, 68% believe they are adequately insured when only 6% have sufficient coverage.
Another common consumer misjudgement lies in replacing insurance with any alternative financial instrument, the study says, adding, "Amongst many such examples, consumers often surrender existing insurance policies for short-term liquidity needs or lower-than-expected returns in a specific timeframe. Further, there is also heightened dependence on employer-provided insurance coverage amongst Indian consumers, making respondents feel that they are completely protected to address any uncertain crisis." 
Coming back to Jeeval Saral, as pointed out by Moneylife, while traditional products could make your premium disappear, in this Jeevan Saral case, it has happened even at the policy maturity level. The reason was that, in the Jeevan Saral policy, the premium remained the same for all ages for a given death sum assured (SA) and policy term, which meant that the maturity amounts would be different. The higher the age, the lower the maturity amount to compensate for higher morality charges. Jeevan Saral was supposed to give better surrender and/or paid-up value. It was considered a good plan with a lot of flexibility for young people. The main issue with the product is for those in the higher age group. (Read: Will LIC Be Made To Pay for the Horrible Mis-selling of Jeevan Saral?)
Thousands of policyholders who purchased Jeevan Saral policies feel badly cheated and have been writing to us for help. After receiving several complaints from Jeevan Saral policyholders, Moneylife Foundation sent a memorandum to IRDAI on 18 August 2018, pointing out that Jeevan Saral (with profit), a traditional policy, has caused senior citizens to lose as much as 65% to 70% of the money invested over 10 years.
After that, Moneylife Foundation, on behalf of lakhs of Jeevan Saral policyholders, filed a public interest litigation (PIL) in the Supreme Court (SC). However, the SC dismissed the petition on the grounds of maintainability. (Read: LIC Jeevan Saral: Supreme Court Asks Petitioners To Seek Recourse under Article 226)
The bench of chief justice Ranjan Gogoi and justice Deepak Gupta says, "We are not inclined to entertain the present petition as a PIL, in which event the maintainability of the petition under Article 32 at the instance of the petitioner nos. 3 and 4 will be in serious doubts as they have an alternative remedy under Article 226 of the Constitution or to initiate proceedings before the appropriate forum. The writ petition is dismissed, leaving the petitioners with the option to avail other remedies in law. We make it clear that we have not expressed any opinion on the merits of the case."
Petitioner no. 3 and 4 in this case were individual policyholders who have suffered a loss in the Jeevan Saral policies.
Just a few days ago, coming down heavily on Bajaj Allianz Life Insurance Co Ltd for unfair trade practices and selling 99-year insurance policies to a senior citizen, the additional district consumer disputes redressal commission for Mumbai suburban directed the insurer to refund the entire premium of Rs8.15 lakh with an interest of 9% from 1 April 2019 to the policyholder.
During the hearing, the district consumer commission determined that Mr Niwatkar had been misled about the policy, particularly since senior citizens typically do not opt for 99-year policies. The bench observed that the policy lacked clarity, and Mr Niwatkar did not receive the expected returns or the ability to withdraw funds for his daughter's wedding. These findings constituted unfair trade practices and service deficiencies, it noted. (Read: Insurance Misselling: Bajaj Allianz Life Asked To Refund Entire Premium of Rs8.15 Lakh with 9% Interest to Senior Citizen
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Kamal Garg
5 months ago
The author is squarely blaming the insurance companies and/or their agents who mis-sell policies. While insurance policy mis-selling is a common place in India ( I have no knowledge whether this kind of practice exists in developed countries or not), but, then, even the educated and knowledgeable persons fall prey to this kind of supposedly mis-selling. In the last few days, SEBI has mandated that all business channels while discussing F&O matters will carry a disclaimer that more than 90% people who do F&O transactions suffer losses; but, then, who listens. There is a serious and phenomenol increase in F&O transactions on our stock exchanges with full knowledge that 90% people suffer losses.
So the point is who listens to the advice of any regulatory body/agent/advisor and it may not be appropriate to squarely blame the insurance companies and its agents for this state of affairs.
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