Last week, the Ministry of Finance tabled data in Lok Sabha which said surrender and withdrawal payouts by life insurers rose to ₹2.80 trillion in FY26 from ₹1.58 trillion in FY22, with their share of total benefits paid increasing from 32 per cent to 39 per cent. At the same time, the share of maturity benefits fell from 48 per cent in FY22 to 37 per cent in FY26. In fact, surrender and withdrawal payouts exceeded maturity benefits in FY23, FY24 and FY26.
The rise in early exits comes amid several factors identified by the Insurance Regulatory and Development Authority of India (Irdai), including affordability of premiums, changes in policyholders’ financial circumstances, product suitability, mis-selling, unmet expectations and inadequate understanding of insurance products.
Why are early exits concentrated in the first two years?
A major proportion of policy exits is concentrated in the early years, particularly within the first 13-24 months of the policy term, according to Kritika Sharma, Project Leader at Boston Consulting Group (BCG).
She attributed the trend to several factors. One is the change in surrender value norms. Sharma said regulatory changes in 2024-25 have made early exits less financially punitive for policyholders.
“This could also make some customers more willing to exit rather than remain in a policy because of high surrender charges,” she said.
Another factor is the gap in financial awareness. Sharma said some first-time buyers do not fully understand the long-term nature of life insurance or the premium commitment when they purchase a policy.
“Early exits can follow when the premium commitment becomes difficult to maintain,” she said. “Mis-selling can add to the problem when the product does not suit the customer's financial situation or needs."
Sharma said distribution practices can also contribute when incentives are more closely linked to new business than to policy persistency.
Is surrender a product-specific problem?
According to Sharma, there is no basis in the government data provided in Parliament to identify one particular insurance product as having the highest surrender rate.
"It would be misleading to frame lapse and surrender as a product category problem," Sharma said.
According to her, the more important factors are whether the product matches the customer’s income, liquidity needs and financial goals, and whether the customer understands the commitment involved.
“Distribution incentives that prioritise new business acquisition over persistency can reinforce the problem across product categories,” she said.
Have regulations improved disclosures?
The regulatory framework has several safeguards for policyholders. The 2024 regulations require life insurers to have a board-approved policy for assessing product suitability and recommending products based on the needs of prospective customers. Insurers and distribution channels are also required to prevent mis-selling and misleading sales practices.
Policyholders must also receive a customer information sheet, while insurers are required to disclose year-wise guaranteed surrender value, special surrender value and surrender values payable. A 30-day free-look period is available after the policy is issued.
The government also said eligible non-linked individual
life insurance savings products are required to offer policy loans, while partial withdrawals are allowed under pension products for specified expenses.
Sharma said while regulatory changes have improved the compliance framework, disclosure alone does not guarantee that customers understand the information at the point of sale.
She said complaints around free-look periods, unsuitable products and undisclosed discontinuance charges continue even after the regulatory changes. Sharma attributed this partly to the structure of insurance distribution, where agents and bancassurance partners can have incentives linked to new business volumes.
She said the focus now needs to be on stronger suitability assessments, simpler product communication and incentives linked to persistency and customer outcomes.
Can early surrender mean a financial loss?
There is no standard surrender amount for a policy exited after one, three or five years. The amount depends on the product and the terms of the policy.
Atri Chakraborty, Chief Operating Officer at IndiaFirst Life Insurance, said customers surrendering policies in the initial years are still likely to receive significantly less than the premiums they have paid.
"The surrender value increases with the policy tenure. However, it remains lower than the amount paid and the maturity proceeds," Chakraborty said.
For
unit-linked insurance plans (ULIPs), the customer cannot access surrender proceeds before the mandatory five-year lock-in period, even if the policy is discontinued earlier, Chakraborty said.
How do insurers explain surrender values?
Chakraborty said insurers communicate policy benefits, tenure, surrender values and the implications of early exit through benefit illustrations, policy documents, pre-issuance verification calls, welcome calls and subsequent customer engagement.
He said the benefit illustration includes the surrender value, which is verified with the customer before onboarding and is also included in the policy document issued after the policy is sold.
Casparus J H Kromhout, Managing Director and Chief Executive Officer of Shriram Life Insurance, said his company uses customer service teams, branch teams and a centralised surrender-aversion team before processing a surrender request.
He said customers are informed about the loss of long-term benefits such as bonuses, maturity value and life cover, and are guided towards alternatives such as policy loans or reduced paid-up options.
Is surrender the only option?
For customers facing a temporary financial problem, there are other options available instead of surrendering the policy.
Kromhout said customers can consider making a policy paid-up, which can reduce the cover, or they can take a policy loan where applicable. He also said changing the premium or payment frequency can help in such situations.
“The appropriate option depends on the reason for considering an exit,” he said.
Chakraborty listed premium holidays, revival options, policy loans, partial withdrawals, paid-up conversion and changes in premium payment frequency as possible alternatives, depending on the product.
Continuing a policy also preserves continuity of life cover. Kromhout said surrendering a policy and buying another one later means fresh underwriting, while the premium could be higher because the policyholder would be older and their risk profile may have changed.
 "Why more Indians are surrendering life insurance policies before maturity")
