Your money: Early surrender of non-par policies leads to big losses

financialexpress.com:

By Nirjhar Majumdar

The insurance regulator has brought out an exposure draft on surrender charges on non-par policies. If implemented, it will alter the policy conditions of non-par policies for those contemplating surrendering their policies in the early part. Surrendering of policies will be attractive for those paying annual premiums over `25,000.

People surrender their policies for two main reasons. One, they find the policies too costly to be kept in force, thanks to forced selling by insurance intermediaries. Two, some agents and brokers are able to convince the customers that the policies they had purchased three years ago are not of much use to them and that “better” insurance products are available in the market.

In the past, insurance agents were given the business target in terms of sum assured and number of policies. They were expected to sell as much risk cover as possible to as many people they could. Now, the target is premium income. They are evaluated by how much premium they can bring from the market. So, they focus on selling high ticket-size policies. In many cases, they sell such policies to people who find it difficult to maintain them later.

So, policies lapse with or without acquiring surrender value. The policies that have just acquired paid-up value get surrendered in large numbers. Another habit of insurers and intermediaries is to register new business by surrendering existing policies. When a new policy is sold in place of the old one, the premiums increase and so do the commissions. Customers lose as they buy the cover at higher cost. Intermediaries gain as they invariably manage to sell policies with higher premiums.

Individuals should buy only that much insurance which they can afford