When Ayaz Parkar's father passed away, the family made a startling discovery. The Qatar-based professional found that his late father had bought 10 life insurance policies: eight with his daughter as the life insured and two covering his grandchildren.
"We discovered them only after he passed away. Why would a senior citizen insure his daughter's life? And that too through eight policies? There is no insurable interest. Clearly, nobody explained to him the product well," said Parkar.
The paperwork raised more questions. In some policies, his father was the proposer and in others, Parkar's sister was both proposer and life insured. Yet, all the premiums were debited from the father's bank account, and his mobile number was registered for OTPs and policy communication.
"When I escalated the issue, I was told the insurer's technology does not detect or prevent third-party premium payments," he said. Parkar approached the insurance ombudsman, but the verdict went in favour of the insurers. He now plans to move the consumer court.
Parkar’s case is a textbook example of what consumer advocates describe as mis-selling, which is the sale of an unsuitable product to customers. Parkar's father may have simply wanted to leave behind some money for his daughter and grandchildren. In many such cases, families discover the problem only after the policyholder's death. Others may realize it earlier and choose to surrender the product.
The data appears to back this trend.
The Reserve Bank of India’s Financial Stability Report 2026 revealed that surrender and withdrawal payouts by life insurers exceeded maturity payouts. Surrenders and withdrawals accounted for 38.3% of payouts in FY26 compared with 36.9% for maturity benefits. The central bank observed that persistently high surrender rates may point to policyholder dissatisfaction, product mis-selling or increasing competition from alternative investment products.
Persistency ratio
Another metric that tells a similar story is the persistency ratio, which measures the percentage of policyholders who continue paying premiums. Latest data from the Insurance Regulatory and Development Authority of India shows that only about half of all policies remain in force after five years. In other words, nearly one in every two policyholders exits before reaching the fifth policy anniversary.
Among major insurers, ICICI Prudential Life reported the highest 61st-month persistency ratio at 58.8% in FY25, followed by Bandhan Life (57.6%), Canara HSBC Life (57.1%), Tata AIA Life (56.7%) and Kotak Mahindra Life (55.3%).
"The high surrender ratio is not merely a policy lapse problem—it is a trust deficit indicator," said Manju Dhake, a partner at 1 Finance. “When a large number of policyholders exit within the first few years, it often signals that the product they bought was not the product they believed they were buying.”
Insurers, however, argued that customer circumstances, not product suitability, are often responsible.
Piyush Trivedi, chief distribution officer at Kotak Life Insurance, said policy discontinuance is frequently driven by changing financial priorities, unforeseen liquidity needs, evolving long-term goals or customers switching to other insurance or investment products.
IndiaFirst Life Insurance's chief operating officer, Atri Chakraborty, cited three reasons: temporary liquidity requirements arising from medical emergencies; job losses, education expenses or changing financial priorities, and life-stage events such as retirement, debt repayment or major family milestones.
Surrenders penalize the policyholders but also hurt insurers.
"There was a time when insurers made substantial gains from policy surrenders. Regulations have since changed, and high surrender levels now strain insurers' finances,” said Manoj K. Pandey, associate professor—insurance and marketing at Birla Institute of Management Technology.
The move towards principle-based regulations and the removal of commission caps under the Expenses of Management framework appear to have had an unintended consequence, Pandey said.
“Commissions, particularly to institutional intermediaries such as banks, have risen sharply. As a result, insurers are paying both higher commissions to acquire business and higher surrender values when policies are discontinued early," he said.
Think long term
Shilpa Arora, chief operating officer at Insurance Samadhan, an insurance grievance redressal platform, said the root problem lies in how life insurance is sold.
"Irrespective of what insurers intend, these products are often sold with a short-term investment mindset. Sellers promise returns while barely explaining the protection element. When policyholders don't see the returns they expected in 3-4 years down the line, they surrender the policy in search of better alternatives," she said.
She also said mis-selling cannot be ignored.
“Banks often have aggressive sales targets. Selling insurance is not only about incentives; sometimes it's about meeting targets to safeguard jobs. Bundling insurance with loans or other banking services is still a reality,” Arora added.
Dhake echoed this view. According to her, early surrenders stem less from affordability issues and more from misaligned expectations.
“Many policies are sold as investment or tax-saving products without adequately explaining the long-term commitment, liquidity constraints, expected returns or the actual purpose of insurance. Customers eventually compare them with mutual funds or fixed-income investments and realize the products do not serve the financial goal they had in mind,” Dhake said.
She argued that persistency should be viewed as a customer outcome metric rather than merely a business metric.
“If distributors are rewarded only for selling policies, and not for ensuring customers stay invested because the product remains relevant, high surrender rates will continue. The industry needs to move from a sales-first approach to an advice-first approach built on suitability and informed consent,” she said.
Does the sales channel matter?
Digitally purchased policies have generally shown slightly better persistency, said Trivedi of Kotak Life, although they still account for a relatively small share of overall business.
“Persistency tends to be stronger in channels where the long-term nature of life insurance is properly explained to customers,” he said.
Arora said individual agents generally outperform banks and brokers on this count because they enjoy longer relationships with policyholders and are better placed to manage expectations.
“Everything boils down to sales targets. Individual agents typically don't face the same pressure as bank employees or brokers,” Arora said.
Not everyone agrees that the RBI’s payout data paints the complete picture.
Satprem Mohanty, co-founder of ValuEnable, an insure-tech platform, argues that surrender and withdrawal figures need to be interpreted carefully. A significant portion comprises withdrawals from group funds such as an employer's superannuation scheme, which are recorded as withdrawals rather than maturity payouts.
He also pointed out that maturity benefits paid today relate largely to policies sold 15-20 years ago, when new business volumes were much smaller. Surrenders, in contrast, arise from a much larger base of policies sold in recent years.
In addition, many modern insurance products pay survival or annuity benefits during the policy term rather than at maturity, naturally reducing maturity payouts.
A more meaningful metric, he said, is surrenders as a percentage of assets under management (AUM). For the top 10 private life insurers and Life Insurance Corporation of India, this stood at about 4% in FY26, broadly unchanged from the previous year. Within this, unit-linked insurance plans had higher surrender rates, 8-15% of AUM, while traditional products reported surrender rates of 3-7%.
Ultimately, the debate is not about whether every surrendered policy was mis-sold. It is about why millions of policyholders who signed up for a long-term contract exited before maturity.
Whether driven by mis-selling, changing financial circumstances or unrealistic expectations, persistency has emerged as a key indicator of customer experience. Insurers will have to ensure product suitability, transparent sales practices and incentives that reward long-term customer outcomes rather than new business.
Buyers, meanwhile, should check an insurer's persistency ratio and understand the surrender penalty before signing up.