Buying insurance policies, it seems, is a popular pastime in India. How else does one explain the lapsing of 16 million traditional policies in 2011-12 - endowment, money-back, etc. This implies after buying a policy, people either realise it doesn't suit their needs or it is unaffordable. So, they stop paying premiums and let the policy lapse.
The high number of lapsed policies has surprised companies too. G N Agarwal, chief executive of Future Generali, says, "The companies are running call centres, persistency verticals and even holding camps to ensure consumers pay premiums. But, somehow, our lapsation ratio seems to be quite high."
Experts and financial planners say the primary reason for the rise is often the fact that insurance is bought without much homework. For instance, Jaya Sarkar (name changed), a school teacher in Kolkata, admits to buying two policies - one to help a family friend (an agent) achieve his target and the other to help get the agent's son married. After her retirement, she stopped paying premiums for one of the policies.
But that's not all. In between, she bought a couple of money-back policies that would give her lump sum amounts in the fifth, 10th and 15th years. "These lump sum amounts would provide extra income and help during any crisis," reasons the 60-year-old, who promptly invested these amounts in post office savings schemes. Too many policies
Most financial planners say a number of their clients have loaded on insurance policies, without planning. As a result, premium payments are one too many. Owing to this, one might not remember the deadlines for paying particular premiums. "Clients have policies that would pay them Rs 1 lakh or Rs 2 lakh after a good 20 years. If one calculates the present value of these policies, it would be negligible," says Amar Pandit, a financial planner.
The reason cited by most for buying a policy is taxation. In the December-March period, when a company's human resource department seeks investment data for benefits under Section 80C, people rush to complete their commitments, sometimes without analysing whether they need to buy a policy or not.
Therefore, the first thing a financial planner has to do is weed out useless policies. "There is no point paying premiums of Rs 1 lakh annually, when the sum assured is just Rs 20 lakh," Pandit says. Instead, he advises clients to buy policies that cost Rs 10,000-15,000 a year, with a sum assured of Rs 1 crore.
He blames insurance companies and agents for selling policies without considering the details of buyers. Given commissions on insurance policies are front-loaded at 30-35 per cent in the first year, no one bothers to connect with the buyer in the second or third years, he says. Buyer-seller disconnect?
Future Generali's Agarwal has reason to be worried. Many private sector insurers' lapsation ratios, or the percentage of lapsed policies vis-a-vis the total number of policies, are as high as 51 per cent. Of the 24 insurers, the ratios of 12 are about 20 per cent. At 12 million, Life Insurance Corporation (LIC) has the highest number of lapsed policies. However, owing to its sheer size, the ratio is only five per cent.
These numbers are only true for traditional policies. If one were to add the number of unit-linked policies, the ratios would be much higher. As the chief executive of a leading insurance company says, due to adverse market conditions, a large number of policyholders have not been paying premiums on unit-linked policies. Unfortunately, the Insurance Regulatory and Development Authority Handbook of Statistics does not capture this number.
Anup Rau, chief executive, Reliance Life Insurance, says, "The key reason for an increase in lapses has been the high attrition rate of agents. This resulted in huge last-mile connectivity gap with customers. As a result, customers are not renewing or are not able to renew their policies. We have tried to fill this gap by using technology to connect with such customers - through SMSes, tele-calling, etc. But this mode of connect hasn't stabilised."
Rau feels since insurance is driven largely by agents, customers should be reminded about policy renewal dates and benefits regularly. Should you surrender or go for paid-up value?
For buyers holding many policies and feeling a financial strain, the best approach would be to go back to the drawing board. The first step should be to look at the annual premium one is paying for all policies. If a policy/s matures after 10-20 years and the sum assured is small, decide whether it is better to continue it. Also, decide which ones to surrender or go for a smaller paid-up value.
If you surrender, you would get the amount immediately. In case the reduced paid-up value option is chosen, you would get the amount on maturity. So, if the amount is really small, say Rs 50,000 or Rs 1 lakh, it makes more sense to surrender this and get the amount. Given the inflationary times, the value of Rs 1 lakh would barely be Rs 20,000 in the next 10 years. As our table shows, it makes more sense to surrender the policy most times. However, invest the amount that you are saving as premium for good returns. This will ensure that you have a good amount as corpus.
Of course, if you have only one lapsed policy with a small sum assured, either buy a bigger policy or revive it. If you have a one big (sum assured) lapsed policy, then it is best to revive it.