Life insurance is supposed to provide financial security for your loved ones, but many people are dropping their policies early. This is a cause for concern, according to Zerodha co-founder Nithin Kamath, who recently highlighted the low persistency ratio of life insurance policies in India.
What is Persistency Ratio and Why Does it Matter?
The persistency ratio tells you what percentage of policyholders keep their life insurance plans active over a specific period. A low persistency ratio means a high number of people are surrendering their policies, which can be disadvantageous for both policyholders and insurers.
Nithin Kamath Questions Life Insurance as an Investment
Kamath pointed out that nearly 50% of life insurance policies lapse after five years. This raises a critical question: if you’re only getting back half of what you’ve paid after surrendering your policy, can it truly be considered an investment?
Surrenders on the Rise
The year 2022-23 witnessed a significant increase in life insurance policy surrenders and withdrawals, a trend attributed to factors like inflation and potentially mis-sold policies.
Data Reveals Trends in Surrenders
- The Insurance Regulatory and Development Authority of India (IRDAI) reported a substantial rise in benefits paid out due to surrenders or withdrawals a 25.62% jump to Rs 1.98 lakh crore compared to the previous year.
- Public sector insurers were responsible for a larger share of surrenders (56.27%), while private insurers accounted for the remaining portion.
- Interestingly, unit-linked insurance plans (ULIPs) were a major contributor to surrenders, particularly for private insurers (62.51%).
Impact on the Industry
High surrender rates can negatively impact the profitability of the life insurance sector. According to IRDAI, rising inflation is a leading factor behind these surrenders.
Life Insurance vs Other Investments
Given the challenges facing the life insurance sector, many investors may ponder whether mutual funds and stocks offer a more viable investment avenue. While each investment vehicle comes with its own set of risks and rewards, it’s important to consider the potential benefits and drawbacks of mutual funds and stocks objectively. Transparency and liquidity are often cited as advantages of these alternatives, but investors should carefully assess their financial goals and risk tolerance before making any investment decisions.
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