Avoid a costly early exit: Steps before surrendering an insurance policy

Assess the policy's returns, risks and liquidity restrictions, and ensure that you can sustain the premiums throughout its term

According to the Reserve Bank of India's (RBI's) Financial Stability Report, the composition of life insurers' payouts signals a structural concern. Surrenders and withdrawals accounted for approximately 38.3 per cent of total payouts in 2025-26, exceeding maturity benefits of 36.9 per cent. The near parity between surrender and maturity payouts suggests that a growing number of policyholders are exiting their policies prematurely.

 

Why policyholders exit early

 

Most premature exits occur from traditional insurance policies. "Policyholders sometimes conclude after purchase that these policies offer little value," says Renu Maheshwari, Sebi-registered investment adviser, co-founder and principal adviser, Finscholarz Wealth Managers.

 

Mis-selling is another important cause. Some buyers realise only later that the product does not match what they were promised. "Many insurance products are mis-sold as investments instead of being presented as insurance or risk-management products. Increased awareness of insurance mis-selling nowadays encourages policyholders to drop unsuitable policies," says Maheshwari.

 

Agents may misrepresent a multi-year premium policy as a single-premium product. "A buyer may be told that they need to pay a large premium only once. When asked to pay the same amount again the following year, they may surrender the policy," says Deepesh Raghaw, Sebi-registered investment adviser, PersonalFinancePlan.

 

Affordability problems can also force an exit. "A buyer may commit to a large annual premium during the tax-saving season but be unable to pay the same amount every year," says Raghaw.

 

Poor product performance can further prompt policyholders to reconsider their purchase. "This is particularly relevant in the case of unit-linked insurance plans (Ulips)," says Raghaw.

 

Early exits are costly

 

A policyholder may receive nothing if a traditional policy lapses before two premiums have been paid. Even after several years, the surrender proceeds may remain substantially below the premiums paid. "A policyholder may receive only a proportion of the premiums paid even after holding a traditional policy for five or seven years, let alone earn a meaningful return on them," says Raghaw.

 

Ulips generally have a five-year lock-in period. "If a policyholder exits a Ulip before the lock-in ends, the proceeds are usually transferred to a low-return fund (the discontinued policy fund, which pays a minimum guaranteed return of 4 per cent per annum). The policyholder can redeem the Ulip proceeds after completing five years," says Maheshwari. Ulips generally offer a less painful exit than traditional insurance plans.

 

Match product to your needs

 

Buyers should first ensure that the policy suits their needs. They can also avoid many problems by using life insurance mainly to cover risk rather than to seek investment returns.

 

Understanding the product is essential. "A buyer who understands the product and finds it suitable is more likely to stay invested," says Raghaw.

 

Term insurance is the principal life insurance product that most people need. "People whose dependants rely on their earning capacity should buy term insurance," says Maheshwari.

 

Most buyers should avoid traditional plans if their primary objective is to earn attractive long-term investment returns. These plans may also provide inadequate protection compared with a term plan.

 

"The investment component goes primarily into fixed-income products. As a result, buyers may find themselves locked into low returns over a long tenure," says Maheshwari.

 

Buyers may be able to meet their protection and investment needs more effectively through a combination of term insurance and mutual funds.

 

Ulips allow investors to switch between debt and equity without incurring tax at the time of the switch. "Tax-efficient switching between debt and equity is the principal advantage of a Ulip," says Maheshwari.

 

This product also has limitations. Investors cannot withdraw their money during the first five years, even in the event of poor performance by the underlying funds.

 

A buyer who does not require life cover may have to bear mortality charges. "A Ulip can be unsuitable for an elderly buyer because mortality charges may absorb a substantial part of their premium," says Raghaw.

 

Deferred annuities are generally unsuitable for investors seeking to grow their corpus rapidly over the long term for retirement.

 

Immediate annuities can be useful by providing retirees with a regular income for life. "An immediate annuity may be useful if purchased during a high-interest-rate period," says Maheshwari.

 

Check premium affordability

 

Before purchasing a policy, buyers should assess whether they can pay the premiums throughout its term. "Buyers should evaluate the recurring premium against their regular cash flow," says Raghaw.

 

They should not commit to a large premium in a rush during the tax-saving season. "Do not purchase a policy merely because of tax benefits or a persuasive sales pitch," says Aditya Mall, appointed actuary, Generali Central Life Insurance.

 

Existing policyholders who face affordability problems should get a policy-specific cost-benefit analysis done. "The analysis should compare continuing the policy with reinvesting the surrender value and future premiums," says Maheshwari.

 

Verify premium structure

 

Buyers should confirm whether a policy requires a single premium or recurring payments. "A buyer may be told that a large premium needs to be paid only once. The buyer may discover in the following year that the same premium is payable again," says Raghaw.

 

Higher commissions on regular-premium plans create an incentive to mislead. "Buyers should read the policy document before committing. The single- or regular-premium status is usually stated on the first couple of pages of the policy document," says Raghaw.

 

Understand liquidity restrictions

 

Understand the lock-in period before purchasing a policy and match its tenure to a genuine long-term goal.

 

"Maintain a separate emergency fund for short-term liquidity needs. Do not treat insurance as a liquidity tool," says Mall.

 

Policyholders should not assume that they will be able to access their money whenever required.

 

Protect yourself from mis-selling

 

Buyers should not purchase a policy in a rush. "Do not purchase a policy under pressure or merely to meet a tax deadline," says Mall.

 

Understanding the product before purchase can prevent most problems. Those who cannot evaluate it independently should obtain professional advice.

 

"A fee-charging adviser is preferable to an adviser who earns product commissions," says Maheshwari.

 

"Buyers should read the policy document and verify the premium structure, whether the policy is linked or non-linked, and whether it is participating or non-participating," says Raghaw.

 

Utilise the free-look period

 

• Use the free-look period to confirm that the policy suits your financial needs and long-term goals. 

• Review the benefits and exclusions. 

• Understand premium commitments, tenure and surrender provisions. 

• Cancel within the free-look period if the policy does not meet your requirements.