By Nirjhar Majumdar
The insurance regulator has brought out an exposure draft on surrender charges on non-par policies. If implemented, it will alter the policy conditions of non-par policies for those contemplating surrendering their policies in the early part. Surrendering of policies will be attractive for those paying annual premiums over `25,000.
People surrender their policies for two main reasons. One, they find the policies too costly to be kept in force, thanks to forced selling by insurance intermediaries. Two, some agents and brokers are able to convince the customers that the policies they had purchased three years ago are not of much use to them and that “better” insurance products are available in the market.
High ticket-size policies
In the past, insurance agents were given the business target in terms of sum assured and number of policies. They were expected to sell as much risk cover as possible to as many people they could. Now, the target is premium income. They are evaluated by how much premium they can bring from the market. So, they focus on selling high ticket-size policies. In many cases, they sell such policies to people who find it difficult to maintain them later.
Surrender value
So, policies lapse with or without acquiring surrender value. The policies that have just acquired paid-up value get surrendered in large numbers. Another habit of insurers and intermediaries is to register new business by surrendering existing policies. When a new policy is sold in place of the old one, the premiums increase and so do the commissions. Customers lose as they buy the cover at higher cost. Intermediaries gain as they invariably manage to sell policies with higher premiums.
Individuals should buy only that much insurance which they can afford comfortably, given their financial profile. Instead of realising after three years of buying a policy that it is of little use to them, they should go through the policy conditions on receiving the documents to see whether they are happy with the benefit structures and exclusions. If they find the benefit structure confusing, they should seek clarification from the concerned intermediary or visit insurers’ offices to get a better understanding of the products purchased. If these simple steps are taken, there will hardly be any need to surrender policies.
Getting a better value out of surrendering a policy can not be a reason to go for life insurance. In a unit-linked insurance plan (Ulip), one can surrender a policy partially or fully when he finds that NAV has increased or has stayed stagnant. In Ulip, the primary objective is to get access to the equity market. Insurance cover is incidental there. In non-par policies, early surrendering always means losses and it hardly benefits the customers.
The writer is an insurance industry analyst