Over 2.30 crore life insurance policies were surrendered by policyholders in 2021-22, well ahead of their maturity. This is more than three times the number of prematurely surrendered policies (69.78 lakh) in 2020-21.
The national lockdown announced by the government on 24 March 2020 following the outbreak of Covid-19 has forced many people across the country out of employment, resulting in cuts to livelihoods and wages. The pandemic has also increased the cost of medical emergencies. To mitigate the crisis, the government announced several measures, including loan moratorium and partial withdrawal from EPF balances. But as the pandemic continues into 2021-22, many have started selling their life insurance policies prematurely to get some cash.
The analysis of the quarterly disclosures made by the insurance companies has shown that 16 of the 24 insurance companies have increased the trend of premature policy sales compared to last year.
State-owned behemoth Life Insurance Corporation companies saw a sharp increase in the number of surrendered policies in 2021-22 compared to the previous year. LIC has a market share of around 64 percent in the life insurance business.
Max Life Insurance, ICICI Prudential, HDFC Life, Bajaj Allianz, Aditya Birla Sunlife, Kotak Mahindra, Tata AIA, Exide Life Insurance, Canara-HSBC, Shriram Life Insurance, Future General India, Ages Federal Life Insurance, Edelweiss Tokyo Life Insurance, Aviva Life Insurance and Bharti Axa, among the other 15 insurance companies, have seen an increase in the number of premature sales of policies during this year.
Surrender value of policyholders’ policies signals distress. The average surrender value paid to policyholders was Rs 62,552, less than half of the average surrender value of Rs 1,67,427 paid to customers in 2020-21. For an LIC policy holder, the average surrender-value of over 2.12 crore policies surrendered in 2021-22 was just Rs 43,306. Last year, LIC policy holders surrendered 53.35 lakh policies and the average surrender price paid to them was Rs 1,49,997.
Only eight companies saw a decrease in the number of surrender policies in 2021-22 compared to the previous year. These are: SBI Life, Reliance Nippon, IndiaFirst Life Insurance, PNB MetLife, Pramerica, Star Union Dai-Ichi, Aegon Life Insurance and Sahara India. Policy holders of these companies surrendered 4.93 lakh policies in 2021-22, which is 21.7 percent less than in 2020-21.
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The companies that saw a sharp increase in the number of surrender policies compared to the previous year are: LIC (298.3 percent); HDFC Life (149 percent); Edelweiss Tokyo (117.4 percent); Canara HSBC (66.4 percent); Future Generali (49.4 percent); Tata AIA (43.45 percent); and Sriram (27.4 percent), Maxlife (16.2 percent) others.
When a policyholder surrenders his policy before maturity, he gets only a small percentage of the accumulated premium. But different companies have different rules for this. As per LIC policy, surrender value is payable only after premium for three years. LIC did not want to comment on the matter.
Insurers generally advise policyholders not to surrender policies prematurely due to dilution of their value.
The guaranteed surrender value amount is usually mentioned in the policy documents. If the premiums are paid for three consecutive years, a policyholder is eligible to receive the surrender value as per the policy specifications.