An American on an average carries 11 credit cards in his pocket. So, in a way America is a country of credit cards. Applying the same logic, it won’t be an exaggeration to say that India is a country of insurance policies or, more precisely, lapsing insurance policies. According to a Business Standard report today, as many as 16 million traditional polices lapsed in India in 2011-12. This means that we are not only buying policies, but after a while we simply stop paying the premium.
What could possibly be the reasons for such a behaviour? For one, it could be that people are buying the policies without understanding what they are getting into, only to realise later that the policy does not suit them and hence they discontinue. The report also notes a certain individual bought a policy to help the insurance agent (family friend) meet his target. Another reason people land up buying a large number of policies is financial illiteracy. With no proper plan in place, people buy multiple policies and later they realise they have too many policy premiums to service, and find it hard to make all payments.
Most people buy insurance policies to avail tax benefits and when it is time to file investment proof, they blindly buy multiple policies. Another reason for lapsing policies is the increasing attrition rate of agents, which stalls renewals. The disappearance of agents will result in a connectivity gap between consumers and the insurer. Since insurance is largely driven by agents, companies don't do follow-ups. The report says surrendering the policy makes more sense. Read the Business Standard report here.
We think, as a buyer it’s your responsibility to understand what you are getting into. Insurance agents are infamous for mis-selling. You may have been a victim of mis-selling. Or may be, you really bit more than you could chew and now can’t afford to make multiple premiums. Whatever the reason, we think as a lay investor you should not try to figure out on your own if you should surrender or take the paid-up value. It’s best to seek advice from a certified financial planner to work out the numbers, and then decide.