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Summary: Of Rs 6.3 lakh crore paid out by life insurers, death claims took 7 per cent, and surrenders took 37 per cent. Half of all policyholders quit within five years, and most lose money doing it. Plain term insurance remains the only life insurance product that is life insurance.
Of the Rs 6.3 lakh crore that life insurers paid out, death claims took 7 per cent. Surrender payouts took 37 per cent. Read those two numbers together, and you have this industry, described by its own regulator.
The figures come from IRDAI's recent consultation paper, a 120-page document read for its new commission rates, not for this. Maturity benefits took 35 per cent and annuity and pension payments the remaining 20. Money paid back to customers who gave up their policies is five times what it pays to families of customers who died.
That should be an uncomfortable fact for an industry whose existence is justified by protecting families from the consequences of a breadwinner's death. Death payouts are loose change against the total. Whatever this industry actually does, insuring against death is very low down on the list.
A second number in the paper explains the first. Industry-wide persistency at the 61st month is 48 per cent, so more than half of policyholders stop paying before five years are out. For some insurers, policies still in force by the tenth year are as low as 8 per cent. Maybe I should start using the word 'victim' instead of 'policyholder'.
But the paper also splits that figure by channel. Policies bought online, with no agent involved, show 61st-month persistency of 71 per cent. A buyer who faced no sales pressure and chose for themself keeps the policy. The gap between 48 and 71 reflects the difference between advice that serves the customer and advice that serves the seller.
The cause is clear. First-year commissions on savings-linked policies run 25 to 37 per cent of premium, and at some companies the whole first-year distribution cost reaches a scandalous 60 to 80 per cent. Renewal commissions on the same products run 0 to 5 per cent. Pay a sales force everything in year one and nothing afterwards, and it will sell policies rather than keep them. Why should anyone be surprised that that is exactly what we have got?
Those who quit at the five-year mark generally do not recover the premium they have paid. Forget returns; they take an actual loss. The industry's defence is that these are savings products, and that judging them as protection is unfair because customers come for the maturity payout. That defence proves the point. A high-commission investment product with a light garnish of insurance, sold by an insurance company, is mis-selling by construction. It does neither of the jobs it is supposed to do.
If you hold one of these policies, the surrender figures are about you, and the decision is harder than the data makes it look. The premium you've already lost is gone either way. Paying for another 15 years to avoid admitting a bad purchase turns a five-year loss into a 20-year one. Ask what the policy will pay you from here, set that against a term plan plus an index fund for the same yearly outgo, and decide on those two numbers.
None of this is criticism of the individual sellers. They work within the design and incentives built for them. The paper points to the conclusion every smart saver had already reached: plain term insurance was always, and will always be, the only life insurance product that makes sense, because it is the only one that is life insurance.
Also read: Retirement's biggest risk is an empty afternoon
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