A recent report has revealed that approximately 49% of life insurance policies with the top 10 insurers are discontinued within five years, resulting in significant financial losses for policyholders.
A survey by personal finance advisory firm 1 Finance has revealed several surprising disclosures on how insurance, mutual funds, and other financial products are mis-sold in India without any intention to serve the consumer’s best interests.
The report highlights mis-selling, where customers are sold insurance products without full or accurate information. Many buyers end up purchasing expensive or unsuitable plans, only to abandon them later, losing their investments and expected benefits. This highlights a pressing need for greater transparency and awareness in the insurance sector to protect consumers from such pitfalls.
“Around 49% of life insurance policies are discontinued within five years, with the average 61st-month persistency ratio for the top 10 life insurers standing at just 51%,” the survey report said, adding, “this means nearly half of policyholders stop paying premiums within five years — often walking away with significant financial losses.”
Also read: Health insurance checklist: 6 tips to maximise benefits for first-time buyers
Banks rake in Rs 21,773 cr in commissions while millions of insurance
During FY24, India’s top 15 banks by market capitalisation earned Rs 21,773 crore in commissions from selling insurance, mutual funds and other financial products, the survey by 1 Finance Magazine reveals.
These commissions are largely driven by the aggressive marketing of high-margin products, often without sufficient customer awareness of associated risks, it added.
43.3% of total benefits paid by insurers go toward surrendered, discontinued or lapsed policies
The report further exposes that 43.3% of total benefits paid by the top 10 life insurers are going toward surrendered, withdrawn, discontinued, or lapsed (SWDL) policies. In many such cases, customers lose their principal amount entirely, making these payouts symptomatic of failed financial outcomes for policyholders buying insurance as investments.
Banks earn up to 100% of commissions by selling policies from own group companies
Alarmingly, banks earn up to 100% of their life insurance commissions by selling policies from their own group companies, pointing to deep-rooted conflicts of interest and raising serious concerns about independent financial advice, the survey revealed.
This may be possible as the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024 allow up to 80% of expenses of management (includes commission) from the first year premium of a traditional policy.
“Banks’ share in premium underwritten has almost doubled from 15.6% in FY14 to 33.1% in FY24 reflects how banks are increasingly using the intelligence of customers’ finances at their hand to push them into financial products. After this, top 10 life insurance companies paying as high as 43.3% towards surrendered, withdrawn, discontinued and lapsed policies, goes on to show that lapsation profits (which comes at the expense of customers) has become the business model of life insurers,” said Kanan Bahl, Chief Editor, 1 Finance Magazine.
Also read: Term insurance at ‘zero cost’ – Should you buy?
Manju Dhake, SVP – Insurance Advisory Practice at 1 Finance, say, “Distributors and intermediaries must be held to fiduciary standards recommending only what aligns with a customer’s needs and risk profile. Additionally, making financial suitability assessments and need-based selling mandatory, as envisioned in the Bose Committee report, can be a turning point. The way forward lies in robust disclosures, tighter audit trails and empowering consumers through transparent advice and not commissions.”
The findings paint a grim picture of how financial products are being sold in India, not as instruments for long-term security, but as short-term commission generators for banks. With billions earned in commissions and millions of customers losing value, the report calls for urgent regulatory scrutiny and reform to protect retail investors.