Insurance rush: 63% buy within an hour, 54% unaware of losing principal

Imagine this: you buy a life insurance policy with full confidence that you’ll manage the premiums. But 12 months later, life happens job change, EMIs, medical expense, a tight month and the renewal gets missed.

That’s not a rare exception. In FY24, 1 in 5 life insurance policies lapsed within the first year (the 13th-month persistency was only 80%). And the longer you go, the tougher it gets: for the top 10 life insurers in India, nearly half the policies don’t make it to year five (the 61st-month persistency was only 51%).

But why is this happening?

A recent survey by Fingrowth Media with Upstox involving 750 life insurance consumers and agents across 20+ cities in India revealed that 63% of insurance customers got less than an hour of explanation before making a decision to buy a life insurance product. This is probably why 54% of customers did not know that a default in renewal premium may lead to a write-down of their principal investments.

On testing customer knowledge, we further found that:

• 71% did not know the difference between a participating and a non-participating policy and

• 50% did not know the difference between an endowment policy and a ULIP, despite many owning one.

Eventually, once they understand the terms of the product, customers may realise that the product was not suitable for them. 47% of customers later found their returns lower than expected.

This could be a contributing factor to high drop-off rates, i.e., lower persistence, in life insurance products. While pure risk-cover products (term insurance) may not be difficult to understand, traditional policies and ULIPs may not be as easy for the common person to comprehend.

Information like:

• How much goes into charges,

• How much you get back if you have to stop paying premiums midway and

• Especially in the case of participating policies, what sum is guaranteed, what is the variable component and on what basis the bonus would be calculated, is often not very clear at the time of sale. This problem compounds when customers do not make enough effort to understand insurance products before buying them.

How harmful can this be for customers?

The actual principal lost when policies are surrendered, lapse or are discontinued is not disclosed. But we can get a sense of the damage by looking at how much insurers pay out on surrendered, withdrawn, lapsed and discontinued (SWDL) policies as a share of their total benefits paid.

According to 1 Finance Magazine, this ratio for the top 10 life insurers in FY24 was a shocking 43.3%. Since surrender values can even be 0%, it can be reasonable to infer that more customer value is being destroyed than is being paid out for genuine life insurance benefits.

In summary

Customers not spending enough time on the purchase decision and high upfront commissions may be two strong contributing factors to lower persistency ratios and high lapsation profits for insurers. Insurance is a complex product and the buyer must spend much more time understanding the product and thinking through whether it meets their suitability or not.