According to the Reserve Bank of India's Financial Stability Report, surrenders and withdrawals accounted for approximately 38.3% of total payouts in 2025-26, exceeding maturity benefits of 36.9%. This near parity between surrender and maturity payouts signals a structural concern as a growing number of policyholders are exiting their policies prematurely. As reported by Business Standard, most premature exits occur from traditional insurance policies, with policyholders sometimes concluding after purchase that these policies offer little value.
Mis-selling remains a significant cause, with some buyers realizing only later that the product does not match what they were promised. According to Business Standard, agents may misrepresent multi-year premium policies as single-premium products, telling buyers they need to pay only once when the same amount becomes payable again the following year. Affordability problems can force exits, as buyers may commit to large annual premiums during tax-saving seasons but be unable to pay the same amount every year. Poor product performance, particularly in unit-linked insurance plans (Ulips), can further prompt policyholders to reconsider their purchase.
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. As reported by Business Standard, a policyholder may receive only a proportion of the premiums paid even after holding a traditional policy for five or seven years. Ulips generally have a five-year lock-in period, with proceeds usually transferred to a low-return fund if exited before the lock-in ends, paying a minimum guaranteed return of 4% per annum.
Buyers should ensure policies suit their needs and avoid using insurance mainly for investment returns. According to Business Standard, term insurance is the principal life insurance product most people need, particularly for those whose dependants rely on their earning capacity. Most buyers should avoid traditional plans if their primary objective is attractive long-term investment returns, as these plans may provide inadequate protection compared with term plans. Ulips allow tax-efficient switching between debt and equity without incurring tax at the time of switch, but investors cannot withdraw money during the first five years even in poor performance.
Before purchasing a policy, buyers should assess whether they can pay premiums throughout its term and evaluate recurring premiums against regular cash flow. As reported by Business Standard, existing policyholders facing affordability problems should get a policy-specific cost-benefit analysis comparing continuing the policy with reinvesting surrender value and future premiums. Policyholders should understand liquidity restrictions, maintain separate emergency funds, and avoid treating insurance as a liquidity tool. The free-look period should be utilized to confirm the policy suits financial needs and long-term goals, with cancellation options available if requirements are not met.
