Do your research well before buying a life insurance plan for the long run

Customers must also avoid the temptation to cash out of their policies mid-tenure, once they have gathered considerable fund value.

The Insurance Regulatory and Development Authority of India (IRDAI) chairman Subhash Chandra Khuntia recently urged insurers to improve their persistency ratios. This figure refers to the percentage of policies sold that gets renewed each year. According to the IRDAI’s Handbook of Indian Statistics (2018-19), the insurer with the best 61-month figure had a persistency ratio of 53.3 per cent. Others fared worse. Khuntia asked insurers to aim for a 13-month persistency ratio of 90 per cent and a 61-month persistency ratio of 65 per cent. 

Poor fit results in high lapse rates 

Policies often lapse because buyers realise a year or two after purchase that the policy is not suited to their needs. This could happen because the seller did not do a proper needs analysis. Sometimes, policies lapse because the seller did not do proper profiling of the customer. “When policies having a high premium are sold to people who don’t have the wherewithal, they tend to let it lapse after a few years,” says Mahavir Chopra, founder, Beshak.org. 

Outright mis-selling is another key cause. “Often, the seller tells the buyer he needs to pay a limited number of premiums. Later, the buyer discovers he needs to pay the premium annually for a long period. He then discards the policy. Customers are also sometimes promised a high rate of return and later discover it will be much less,” says Kapil Mehta, co-founder and managing director, Secure Now Insurance Broker. 

Insurers are offering premium holidays 

Insurers are coming up with features that can reduce the probability of lapsing. Premium holiday is one. If a person has paid a few premiums and is unable to pay it for one year, the policy does not lapse. Next year, once his cash flows are back on track, he can restart paying the premium. “In many of our recently launched products, we have offered the premium holiday feature,” says Rushabh Gandhi, deputy chief executive officer (CEO), IndiaFirst Life Insurance. Insurers are also requesting the regulator to allow them to collect the premium in advance so that policies don’t lapse due to a cash flow mismatch. Insurers have also made more payment options available. Says Ashish Rao, chief-customer experience and operations, ICICI Prudential Life Insurance: “Our customers can make renewal premium payments through WhatsApp, mobile wallets, Unified Payments Interface, Bharat Bill Payment, net banking, credit and debit cards, and Google Pay.” 

Policy lapse carries a high cost 

Allowing a policy to lapse in the early years means a significant loss of value for the customer, especially in traditional policies, which constitute the bulk of the market. “The surrender charges tend to be high in the initial years in these policies. The returns are anyway moderate. If you allow it to lapse, the surrender value you get will be quite low,” says Mehta.

Check for suitability  

Before buying, make sure the policy is well suited to your needs. “First, identify your needs properly. Then do a lot of research about the product you plan to buy. Ask a lot of questions and speak to several people,” says Gandhi. 

Insurers offer what is called the Key Features Document (KFD). “The aim is to facilitate a better understanding of the product and its features,” says Rao. Go through it closely. Also, look up the benefit illustrations of a few players. Comparing will give you a sense of whose product is more cost-effective.   

Answer a few crucial questions before arriving at a decision. “Ask if you will be able to afford the premium for the policy tenure. You should also be comfortable with not being able to withdraw the money for a certain number of years. And you need to be fine with the return that the policy is likely to offer,” says Chopra. Returns may not exceed 4-6 per cent in traditional policies. 

Choose the right product category. “Buy a term policy to ensure adequate protection for your family. If you are looking for a combination of good returns and tax benefits, go for a low-cost Ulip,” says Naval Goel, CEO and founder, PolicyX.com. 

Having bought it, keep it

After the purchase, do not fall prey to the temptation to surrender the product midway through its tenure. “If, say, you are saving for your retirement through a unit-linked insurance plan (Ulip), don’t at any stage succumb to the temptation to surrender and withdraw the fund value,” says Gandhi. 

If your agent asks you to switch your policy, investigate whether this is really called for. Sometimes it may be. “Term insurance premiums were falling during the past few years. A shift would have been beneficial then,” says Goel. But in most cases, treat such a request as a red flag. Sometimes, financial difficulties may crop up. “Traditional products offer the ‘loan against policy’ feature which can enable policyholders to tide over their cash crunch,” says Rao. Ulips allow partial withdrawal. 

Insurers conduct ‘revival campaigns’ wherein customers’ lapsed policies are reinstated without penalties. Take advantage of such campaigns. “Regulations allow customers to revive their linked policies within three years and non-linked ones within five years,” says Rao. 

Sometimes, policies lapse because the customer cannot be contacted. “Make sure you keep updating your contact details. Also, put standing instructions in place so that you pay the premium before the due date,” says Mehta.