Covid distress? Sharp surge in surrender of insurance policies

In the fiscal year 2021-22, over 2.30 crore life insurance policies were surrendered by policyholders before their maturity, a significant increase compared to the 69.78 lakh policies surrendered prematurely in 2020-21. The surge in surrenders can be attributed to the lingering impact of the Covid-19 pandemic, which triggered a nationwide lockdown in March 2020, causing job losses, reduced income, and increased medical expenses.

To alleviate financial distress, the government implemented various measures such as loan moratoriums and partial withdrawals from EPF balances. Despite these initiatives, the persistent challenges led many individuals to opt for premature surrender of their life insurance policies to access immediate funds.

Analysis of quarterly disclosures by insurance companies revealed that 16 out of 24 insurers experienced a rise in premature policy surrenders compared to the previous year. The state-owned Life Insurance Corporation (LIC), holding a market share of nearly 64%, witnessed a substantial increase in surrendered policies. Other prominent insurers like Max Life Insurance, ICICI Prudential, HDFC Life, and Bajaj Allianz also reported a surge in premature policy sales.

The surrender value, indicative of policyholders’ distress, showed a significant decrease. The average surrender value paid to policyholders in 2021-22 was Rs 62,552, less than half the amount paid in 2020-21 (Rs 1,67,427). LIC policyholders, in particular, received an average surrender value of just Rs 43,306 for the over 2.12 crore policies surrendered during the fiscal year, compared to Rs 1,49,997 for 53.35 lakh policies surrendered in the previous year.

Eight companies, including SBI Life, Reliance Nippon, and IndiaFirst Life Insurance, witnessed a decrease in surrendered policies in 2021-22. In contrast, LIC, HDFC Life, EdelWeiss Tokio, Canara HSBC, Future Generali, TATA AIA, and Shriram reported sharp increases.

The reasons behind surrendering policies vary, and when policyholders surrender before maturity, they receive only a small percentage of the deposited premium. Different companies have distinct rules for surrender values, with LIC, for instance, stating that surrender value is payable only after three full years of premium payments. Insurers generally advise against premature surrenders due to the dilution of policy value. The guaranteed surrender value is typically outlined in policy documents, and policyholders become eligible to receive it after three consecutive years of premium payments.

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