Insurance policies

Covid distress? Sharp increase in insurance policy redemptions

MORE THAN 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 policies (69.78 lakh) redeemed early in 2020-21.

A nationwide lockdown announced by the government on March 24, 2020, following the Covid-19 outbreak, had forced many people out of their jobs across the country, leading to loss of livelihoods and pay cuts . The pandemic has also led to increased expenses due to medical emergencies. To alleviate the distress, the government announced several measures including a moratorium on loans and a partial withdrawal of EPF balances. But with the pandemic lingering even in 2021-22, many have started prematurely selling their life insurance policies to realize funds.

As many as 16 out of 24 insurers witnessed an increase in the premature sale of policies by policyholders compared to the previous year, an analysis of quarterly disclosure made by insurance companies reveals.

State giants Life Insurance Corporation Companies have noticed a sharp increase in the number of policies surrendered in 2021-22 compared to the previous year. LIC has a market share of almost 64% in the life insurance sector.

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 Generali India, Ageas Federal Life Insurance, EdelWeiss Tokio Life Insurance, Aviva Life Insurance and Bharti AXA are the other 15 insurers that saw an increase in the number of premature policy sales during the year.

The cash value of the insured’s policy gives an indication of distress. The average cash value paid to policyholders was Rs 62,552, less than half of the average cash value of Rs 1,67,427 paid to policyholders in 2020-21. For the LIC policyholder, the average surrender value of over 2.12 crores of policies surrendered in 2021-22 was only Rs 43,306 then. In the previous year, LIC policyholders surrendered 53.35 lakh of policies and the average surrender value paid to them was Rs 1,49,997.

Only eight companies recorded a decrease in the number of policies surrendered 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. Policyholders of these companies redeemed 4.93 lakh of policies in 2021-22, down 21.7% from 2020-21.

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Among the companies that saw a strong increase in the number of policies surrendered compared to the previous year were: LIC (298.3%); HDFC Life (149 percent); Edel Weiss Tokio (117.4%); Canara HSBC (66.4 percent); Future Generali (49.4 percent); TATA AIA (43.45 percent); and Shriram (27.4%), Maxlife (16.2%) among others.

When a policyholder surrenders their policy before maturity, they only receive a small percentage of the premium deposited. But different companies have different rules for this. Under the LIC policy, the cash value is payable only after the premium for three full years. LIC declined to comment on the matter.

Insurers normally advise policyholders not to surrender policies prematurely as their value is diluted.

The guaranteed cash value amount is usually mentioned in the policy documents. If premiums are paid for three consecutive years, a policyholder is eligible to receive cash value in accordance with policy specifications.