THAT’S LIFE. Medical expense, child’s education, or retirement can alter a policyholder’s liquidity needs | Photo Credit: Wipada Wipawin

The recent discussions on the high rate of life insurance surrenders and the likely role played by mis-selling are important and deserve attention. Mis-selling, wherever it occurs, must be addressed firmly. At the same time, aggregate surrender figures should be interpreted with care. The word “surrender” in life insurance statistics covers a wide range of customer behaviour and product structures, and does not always mean that a customer has rejected insurance or the original sale was unsuitable.

Terminology matters

Life insurance and mutual funds use different terminology for similar customer actions. For example, a unit-linked insurance plan (ULIP) combines insurance protection with market-linked investment. After the lock-in period, a policyholder may choose to withdraw or redeem the accumulated value. In the insurance industry, such an exit may be recorded as a “surrender”, while it is generally described as “redemption” in the mutual fund industry.

The terminology can, therefore, create an impression that every exit represents a failure of the insurance product, when in reality it may simply be the customer’s decision to access accumulated funds.

Long-term intent

Many life insurance products are deliberately designed with long policy durations because insurance is fundamentally a long-term financial commitment. At the same time, depending on the nature and terms of the product, customers may have access to benefits such as partial withdrawals, surrender or other permitted exit options. An urgent medical expense, a child’s education, a family event, retirement needs or a change in financial priorities can alter the customer’s liquidity requirements.

Exercising an available exit or withdrawal option in such circumstances should not automatically be construed as dissatisfaction with the product or evidence of mis-selling.

To put things in perspective, the ratio of surrender payouts to total life insurance premium collected during the year has progressively increased from 21 per cent in FY20 to 26 per cent in FY25, largely due to the availability of surrender in ULIPs after the 2024 IRDAI regulations.

Since ULIPs generally have a lock-in period and combine insurance protection with market-linked investment features, it is apparent that customers have ‘redeemed’ or ‘cashed out’ their investment rather than ‘surrendered’ it.

It is always likely that the customer has invested the proceeds in another protection/ savings policy to improve their financial resilience.

Nature of product

A meaningful assessment should distinguish between pure protection products and fund-based or savings-oriented insurance products. For a pure term insurance policy, a surrender or early discontinuance may indeed be a more direct signal that the policyholder no longer wishes to retain the protection. But for ULIPs, participating savings products, and certain single-premium products that combine risk cover with investment or capital appreciation, customer exits can reflect investment decisions, liquidity needs or changes in financial priorities.

’Exit’ not end of cover

In some cases, a policyholder may alter the policy, withdraw value, or reduce the cover without completely ending the insurance relationship or all the associated risk protection. Therefore, equating every recorded surrender with termination of life insurance protection may oversimplify the actual customer journey.

The right measure

The objective should be to identify genuine mis-selling without unintentionally portraying every customer exit as evidence. A more informative analysis would distinguish between pure protection and fund-based products; surrender, partial withdrawal, maturity and other exit routes; exits before and after lock-in periods; customer-initiated liquidity events; and policies where risk cover continues after a change in policy value or benefits. Such a segmentation would provide a far more accurate picture of customer behaviour and product suitability.

Mitigating surrenders

To offer a more personalised approach, various life insurers have mandated a personal intervention process. Customers are counselled about the probability of new policies being offered at a higher rate due to advanced age and adverse medical conditions. Where the policy has been in force only for a short duration, the customer is apprised that the surrender value may not even cover the paid premiums. To help fulfil the temporary need for funds, insurers are offering loan against policies or facilitating partial withdrawal in ULIPs. Future communication campaigns will direct attention towards these measures in a bid to educate customers about the pitfalls of policy surrenders.

A balanced conclusion

High surrender numbers should certainly prompt questions, but they should not become a proxy for mis-selling. The life insurance sector must continue to improve transparency, suitability assessment, and customer education. At the same time, the public discourse should recognise that modern insurance products increasingly provide customers with flexibility and liquidity options.

A customer who chooses a long-term product with an open option to access funds when needed is not necessarily rejecting life insurance; they may simply be exercising the flexibility that the product was designed to provide.

(The writer is Secretary General, Life Insurance Council)

Published on September 14, 2026