Surrender and withdrawal benefits paid by life insurers have increased significantly, with the proportion rising from 32% in 2021-22 to 39% in 2025-26, according to Parliamentary information provided by Minister of State for Finance Pankaj Chaudhary. This represents a substantial increase in surrender and withdrawal behaviour over the last five years. As reported by The Hindu BusinessLine, these benefits now exceed maturity benefits paid by the life insurance sector, indicating a fundamental shift in how policies are being handled. In absolute terms, surrender and withdrawal payouts rose to ₹2.80 trillion in FY26 from ₹1.58 trillion in FY22, while maturity payouts increased to ₹2.70 trillion from ₹2.40 trillion over the same period. The Union government's recent Parliamentary disclosure highlights this worrying trend in India's insurance market, with surrender and withdrawal payouts accounting for 39% of benefits paid by life insurers in 2025-26.
The latest data reveals the severity of policy abandonment, with 86 lakh individual life insurance policies lapsing in FY 2024-25, causing a massive ₹8.7 lakh crore cover loss across the industry. According to IRDAI data, persistency rates show that only 22-59% of policies survive beyond five years, while 60-83% remain active after the first year. This crisis is particularly concentrated in the traditional small-ticket endowment segment, with policyholders typically buying modest endowment and money-back plans from large insurers' extensive agent networks. The gap between premium-weighted persistency and policy count persistency is particularly pronounced, with LIC showing a 13-point difference at the 61st month, indicating that smaller premium policies are disproportionately affected. As Business Standard notes, these numbers point to a fundamental weakness in policy persistency, which is a key indicator of whether customers continue paying premiums and retain policies until maturity.
State-run Life Insurance Corporation of India (LIC) faces significant challenges with persistency, reporting 64% persistency by policy count and 74.8% by premium at the 13th month in FY 2024-25. The company's premium-weighted persistency is nearly 11 points higher than its by-count figure, suggesting that smaller ticket policies are lapsing at a disproportionate rate. LIC's persistency by premium shows 74.8% at the 13th month, while by policy count it stands at 64%. This gap widens over time, with the difference reaching nearly 13 points at the 61st month, indicating that the company's massive small-ticket policy base is experiencing higher attrition rates. The challenge extends beyond consumer behaviour to product design, sales incentives, and financial literacy, as highlighted by Business Standard.
The proportion of maturity benefits in total benefits paid by life insurers has decreased from 48% in 2021-22 to 37% in 2025-26, as reported by the Minister. This decline coincides with the increase in surrender rates, suggesting that policyholders are choosing to exit policies earlier rather than allowing them to mature. The insurance regulator IRDAI has attributed this trend to multiple factors including product suitability issues, affordability concerns, policyholder expectations not being met, mis-selling practices, lack of policyholder awareness and understanding of insurance products, and changes in the financial circumstances of policyholders. As Business Standard emphasizes, insurance is meant to provide long-term financial protection, and a market where an increasing share of customers exits before policies mature raises questions about whether products are meeting consumer needs in the first place.
