Lower insurance surrender charges an overdue reform
The insurance regulator’s latest proposal to increase the surrender value of traditional insurance policies is a ‘reform’ long overdue. The insurance sector—despite big claims from the regulator and insurers—is known for rampant mis-selling. Agents would sell insurance products by calling them savings plans, give wrong information on benefits, premium terms and the various charges. Unaware of the fine print, clueless investors often end up signing up for long-term plans with very low returns. Once they realise the mistake, the punishing surrender charges make it impossible for them to get out of this situation. Some are forced to let go of a large chunk of their life’s savings.
Surrender value, or the amount one receives for surrendering a policy without completing the full term, of non-participating insurance plans are currently very low. If one pays Rs 1 lakh a year for three years in premium, and wants to surrender the policy after that, she would receive only 30 percent of the total premium paid so far. That is a huge cost for mistakenly buying an insurance plan that serves very little purpose—both in terms of insurance cover or returns. According to the insurance regulator’s new proposal, there will be a premium threshold defined for each product. There will be no surrender charges imposed on the balance of the premiums beyond the threshold limits, irrespective of the timing of the surrender. It is only a proposal and the regulator has asked for feedback from stakeholders on it. One would hope that the regulator does not get too swayed by the strong insurers’ lobby and defang the proposed change.
The penetration for life insurance in India is now just over 3 percent of GDP. This is abysmally low for a country of 1.4 crore people. Financial illiteracy and low levels of financial inclusion are said to be the reasons for this poor reach of insurance. But unscrupulous sales pitches and rampant mis-selling are also some key reasons for people getting disillusioned with insurance products. There have been many instances where retirees are sold long-term insurance products without being told of the benefits. These are largely criminal offences that go unpunished. The lower surrender charges proposed by the regulator would at least allow policy holders to correct their ‘mistakes’ without having to pay exorbitant costs.