Where your life insurance premium really goes: Policyholders funded a sharp rise in costs; IRDAI proposes a reset

When you pay the first premium on a life insurance policy, a significant part of that money never goes towards insuring you. Data from the Insurance Regulatory and Development Authority of India (IRDAI) shows how sharply the cost of buying a life insurance plan has escalated. It shows that remuneration paid to distributors has been growing four to five times faster than the premium it is earned on, and it is the policyholder who funds the difference.

In the life insurance corporate agency channel of banks, NBFCs and other corporate agents, new business premium grew 28% between FY23 and FY25, from about ₹63,000 crore to ₹80,000 crore. Distributor remuneration on the same business, including commissions, rewards and incentives, grew 125%, from about ₹9,580 crore to ₹21,600 crore.

The paper says that the effective distributor remuneration represents nearly 27% of first-year premium, with rewards, incentives and other commercial arrangements adding 30% to 60% over base commission.

“Remuneration is growing four to five times faster than the business it is paid on,” the paper said. “This has created a ‘buyer beware’ market in which consumers themselves are expected to decipher complex financial products,” the IRDAI said.

“As these costs are ultimately funded from policyholder premiums, their magnitude and structure assume increasing importance from the perspective of customer value, insurer expense management and regulatory oversight,” the paper said.

What the seller earns depends on what you buy

The commission on pure term plans averages 51% of first-year premium across life insurers, going up to 81%. Traditional insurance-based savings products pay 25% to 37% on average, with maximum of 60% to 63%..

The paper said that effective pay-outs on savings products ranged from 29% to 60% of first-year premium, exceeding 65% in some cases, and from about 5% to nearly 40% on unit-linked plans (ULIPs). The cost also feeds into what you pay year after year.

In general insurance, premium routed through brokers rose 37% between FY23 and FY25, but commissions on it rose 173%, with average commission rates doubling from 8.5% to 17%. Motor insurance commissions nearly tripled from around 9% to 25% of premium in two years, and retail health commissions rose from around 10% to 30%.

The consultation paper has traced the reversal to the 2023 framework, which scrapped commission caps in favour of entity-level expense limits.

The total expense ratio of private life insurers, which had fallen from 21.3% of gross premium in FY15 to 16.5% in FY21, climbed back to 20.2% in FY26. In general insurance, the ratio has climbed from about 25% in FY19 to 32.1%.

“The discipline achieved over a decade has been unwound in the space of a few years and it is policyholders who have funded the reversal,” the paper said.

The damage also shows up in outcomes of the policy issued. The paper said that only 48% of life policies survive to the 61st month, while policies bought directly online show 71% persistency. Of the ₹6.3 lakh crore of benefits life insurers paid out, surrender pay-outs accounted for ₹2.33 lakh crore, or 37%, against death claims of just ₹0.47 lakh crore, or 7%. The paper also notes that “in life insurance the flexibility is used to make higher payouts compromising returns to policyholders”.

How IRDAI plans to make life insurance affordable for policyholders

The IRDAI paper has proposed three-part fix to make life insurance affordable for policyholders.

• Expense limits would be tightened on a glide path: 15% of premium for life insurers in two years and 12.5% in five years, and a reduction for general insurers from 30% of gross written premium to 20% of gross direct premium income over five years.

• Commissions would return to hard caps, calibrated by “the segment, line of business, distribution channel, product complexity and the effort involved in selling and servicing the product”.

• And the definition of commission would be widened to cover “all forms of remuneration, direct or indirect, monetary or non-monetary”, backed by mandatory cost audits of insurers and large distributors and public disclosure of commission policies.

However, sales in under-served areas, such as small towns and rural areas, may earn rewards over and above these limits.

IRDAI said that the proposed reduction in expenses “is intended to lower the overall cost of insurance, thereby expanding the risk pool available in general insurance and enhancing returns to policyholders in life savings products”.

The regulator has invited public comments on the proposals until October 25, 2026.