Surrendering your life insurance? Think again

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Published: October 23, 2019 1:42:06 AM

Before buying a life insurance policy, look for an insurer with higher persistency ratio which is an indication that policyholders are satisfied with the company.

It is calculated on the basis of the number of policyholders paying the premium divided by net active policyholders, multiplied by 100.

While the insurance regulator has taken steps to increase the persistency ratio of life insurance policies, customers should check the ratio before buying a life cover. Higher persistency ratio of an insurance company means that policyholders are satisfied with the insurer’s policies and renewing their policies every year.

In 2017-18, the persistency ratio for India’s life insurance industry stood at 69% in the 13th month. It means that out of 100 policy holders, only 69 renewed their life policies after the first year. The 61st month persistency ratio was only 35%, which means nearly two-thirds of all policyholders did not renew their policies after the fifth year. Poor persistency levels or higher lapsation means people are paying huge surrender costs.

Customers’ trust

Persistency ratio of all life insurance companies is measured at 13th month, 25th month, 37th month and 61st month and the data is available in Irdai’s Handbook of Indian Insurance Statistics. As a life insurance policy is to secure long-term financial commitments, lower long-persistency means that policyholders are not giving adequate thoughts to the needs of a life insurance policy. It is calculated on the basis of the number of policyholders paying the premium divided by net active policyholders, multiplied by 100.

In 2017-18, the highest 61-month persistency (based on number of policies) was recorded by ICICI Prudential Life Insurance Company at 49%, followed by Kotak Mahindra Life Insurance Company at 47.2%. The lowest 61-month persistency was recorded by DHFL Pramerica at 15.6%, followed by Shriram Life Insurance at 19.24%. The highest 13-month persistency was recorded by Kotak Mahindra Life Insurance at 81.11%, followed by ICICI Prudential Life Insurance at 80.7%. The lowest 13-month persistency was recorded by Shriram Life Insurance at 52.02%, followed by Bharti AXA Life Insurance at 57.44%.

Long-term needs

Buying an insurance cover is protecting one’s family in the long run. When a policy lapses because the policyholder does not pay to renew the policy, then the policyholder loses money through surrender charges. Continuity in life insurance would enable a policyholder to reap the benefits of the policy as according to the Insurance Laws Amendment Act, all commitments will be honoured if a policy has been active for three years without any breaks.

As a thumb rule, an individual should have a life insurance cover that is 10 times his current annual income. Experts say that the the total sum assured of all life policies put together must adequately cover one’s dependents in the long run, should something happen to the breadwinner.

Surrender value

In July this year, the insurance regulator had revised the surrender charges for both linked and non-linked life insurance products. All protection-oriented non-linked products will have guaranteed surrender value. If the premium has been paid for two consecutive years, the policy will acquire a guaranteed surrender value. It will be 30% of the total premium paid less any survival benefits already paid, if surrendered during the second year of the policy.

In case the policy is surrendered during third year, it will be 35% of the total premium paid, less any survival benefits. If surrendered between the fourth and the seventh year, then it will be 50% of the total premium paid. In case it is surrendered during the last two years of the policy, then the policyholder will get back 90% of the premium paid.

Before the new norms came in from July, if a policyholder had a traditional plan, which bundles investment with insurance, he would lose all his money if it was not renewed in the second year. If one surrendered after year two and three, the insurer paid back only 30% of the total premium. Between year fourth and the seventh year, the surrender value was 50% of the premium paid. After eighth year, the surrender value increased.

Before purchasing the policy, it is important to understand whether the policy suits the needs of the customer. Read the fine-print, so that if there is any issue it can be address during the free-look period. This will increase the chances of the policyholder sticking to the policy in the long run.

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