How Mis-Selling and Low Surrender Values Are Costing Life Insurance Buyers Dearly in India

Life insurance is meant to provide financial protection to families in their most vulnerable moments. However, for many Indian households today, life insurance has become a source of financial loss rather than security.

The issue is not insurance itself — it is mis-selling combined with low surrender values, which quietly erodes household savings and damages trust in the system.

According to the latest Financial Stability Report by the Reserve Bank of India, early exits such as surrenders and withdrawals accounted for nearly 37% of all life insurance payouts in FY25. In comparison, maturity claims were around 35%, while death claims were only about 7.5%.

This data reveals a troubling reality: a large number of policyholders are exiting insurance policies early, often at significant financial loss.

Early surrender is rarely a planned decision. It usually happens when families face:

1. Medical emergencies
   
2. Cash-flow stress
   
3. Business disruptions
   
4. Job losses or income instability
   

The problem begins at the point of sale.

Many life insurance products are marketed as:

1. “FD-like investments”
   
2. “Safer than mutual funds”
   
3. “Guaranteed savings with protection”
   

In reality, life insurance is a long-term, illiquid product. Unlike fixed deposits or mutual funds, insurance policies are not designed to be exited early. When policyholders need money urgently, surrender becomes the only option — and that is where the damage occurs.

Low surrender values magnify the financial impact of mis-selling.

In the first few policy years, surrender values are often a small fraction of the premiums paid. Exiting a policy in the second or third year can mean losing a significant portion of hard-earned savings — money originally meant for retirement, children’s education, or long-term security.

This creates a dangerous cycle:

1. Product is sold as flexible or “safe savings”
   
2. Policyholder assumes liquidity
   
3. Life event forces early exit
   
4. Low surrender value leads to heavy losses
   

For many families, this loss is irreversible.

Regulators have introduced safeguards such as:

1. Need-based selling requirements
   
2. Product illustrations
   
3. Customer declarations and consent
   

However, compliance without comprehension offers little real protection.

In practice, these safeguards often become:

1. Another OTP
   
2. Another signature
   
3. Another formality
   

Without genuine understanding, policyholders remain vulnerable — especially those unfamiliar with financial products.

Certain groups face higher risk:

1. Senior citizens, who may prioritise safety and liquidity
   
2. First-time insurance buyers, unfamiliar with policy structures
   
3. Small business owners, who rely on accessible funds during downturns
   

For these buyers, the consequences of low surrender values can be financially devastating.

To protect policyholders and rebuild confidence, structural changes are essential:

1. Fairer and more transparent surrender value structures
   
2. Better alignment of distributor and agent incentives
   
3. Stronger verification of customer understanding, not just consent
   

Life insurance works only when the product sold genuinely matches the customer’s needs and expectations.

Insurance delivers value only when expectation and reality align. Until products are sold with transparency, fairness, and true understanding, many Indian families will continue to lose more than they gain — silently and often too late

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