Why Over a Third of Life Insurance Payouts Come From Early Exits?

Life insurance is meant to provide long-term financial protection, either through maturity benefits or support for families in case of death. However, recent data from the Reserve Bank of India (RBI) suggests that India’s life insurance system is increasingly failing to serve this purpose.

The Life insurance is meant to provide long-term financial protection, either through maturity benefits or support for families in case of death. However, recent data from the Reserve Bank of India (RBI) suggests that India’s life insurance system is increasingly failing to serve this purpose.

The Financial Stability Report 2025 highlights a worrying trend. While payouts by life insurance companies have risen sharply, a large part of this increase is not due to policies reaching maturity. Instead, many policyholders are exiting early, often at a financial loss.

Life Insurance Payouts Are Rising, But Not for the Right Reasons

According to RBI data, total benefits paid by life insurers increased from around ₹4 lakh crore in 2020–21 to ₹6.3 lakh crore in 2024–25. At first glance, this growth appears positive. However, a closer look shows that the nature of these payouts has changed.

Around 37% of total payouts now come from policy surrenders and withdrawals, meaning people are giving up their policies before completion. By comparison, only about 35% of payouts are from policy maturity, while death claims account for just 7.5%. This indicates that life insurance is increasingly being treated as a short-term product rather than long-term protection.

Why Are So Many Policyholders Exiting Early?

Several factors contribute to the high surrender rate. Many policyholders realise over time that the returns are lower than expected. In other cases, premiums become difficult to afford. A major issue highlighted by regulators over the years is mis-selling, where policies are sold without clearly explaining costs, lock-in periods, or suitability.

Beyond mis-selling, RBI data points to a structural issue. The insurance distribution model relies heavily on commissions, especially in the private sector. High upfront commissions encourage aggressive sales, but once the first year is over, long-term customer outcomes often receive less attention.

Public vs Private Insurers: A Clear Difference

RBI data shows a clear contrast between public and private insurers. Public life insurers have managed to keep commission expenses largely stable even as premium collections increased. This suggests lower acquisition costs and more controlled spending.

Private life insurers, on the other hand, have seen a sharp rise in commission payouts and operating expenses, particularly after 2022–23. This indicates that growth is being driven by high-cost distribution, which may indirectly encourage frequent policy churn.

A similar pattern is visible in non-life insurance, especially health insurance, where rising commissions and expenses can affect service quality and claim experience.

Conclusion

The RBI’s findings show that high surrender rates in life insurance are not accidental. They reflect a system that prioritises sales over long-term value for policyholders. For consumers, this underlines the importance of understanding products fully, assessing affordability, and viewing life insurance as long-term protection rather than a quick-return investment.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.