RBI Financial Stability Report: Early Surrenders Form 37 Per Cent Of Life Insurance Payouts

Life insurers are paying out more money because people are giving up their policies midway rather than allowing them to mature or paying out claims upon death. The Reserve Bank of India (RBI) data for FY25 shows that about 37 per cent of benefits paid by the industry came from early exits such as surrenders and withdrawals. Total payouts have climbed sharply over the past few years, from roughly Rs 4 lakh crore in FY21 to close to Rs 6.3 lakh crore in FY25, according to the RBI’s Financial Stability Report.

What stands out in the latest numbers is not just the size of the payouts but the reason behind them. Life insurance has traditionally been sold as a long-term financial cushion. However, the dominance of premature exits suggests that buyers are either disappointed with returns, strapped for cash, or simply misaligned with the products they purchase. In several cases, surrendering a policy early leads to a loss because the amount received can be lower than the premium outlay.

Maturities No Longer Drive The Bulk Of Payouts

Maturity benefits, once the primary driver of payouts in life insurance, accounted for about 35 per cent in FY25. Death claims made up only 7.5 per cent. The contrast indicates that many policyholders may be treating life insurance as a semi-liquid savings instrument, one that can be broken if short-term needs arise, rather than as long-term protection.

A mix of factors appears to be behind the shift. In many households, money has been tighter over the past few years, and insurance premiums are often the first expense to be trimmed. At the same time, expectations around returns have changed. Traditional plans offer guaranteed but modest outcomes, and unit-linked products carry market swings that not everyone wants to live with. Both scenarios can push buyers toward surrendering rather than staying invested.

Sales Practices And Incentives Under Scrutiny

Another uncomfortable issue sits beneath the surface: the way life insurance is sold in India. The industry has long been criticised for relying on commission-heavy distribution, with incentives stacked toward selling rather than retention. When a product is pitched as a short-term investment or as an aggressive wealth creator, the buyer often exits once the initial story does not hold up. This breeds dissatisfaction and, ultimately, a surrender.

For customers, cashing out early rarely works in their favour. The surrender amount can be modest, particularly in the opening years, and some policies carry penalties. Insurers don’t love it either. When too many people walk away midstream, it throws off pricing assumptions and forces companies to rethink how these products are built and sold. High surrender rates also make it more challenging to inform investors and regulators that life insurance is a long-term protection tool.

A Sector At An Inflection Point

The RBI’s data arrives at a moment when India is still significantly underinsured in pure protection terms. If buyers continue to walk away before policies deliver their intended benefit, the sector may have to rethink how products are structured and explained. Better financial counselling and clearer disclosures could help, as could aligning incentives toward long-term outcomes rather than front-loaded commissions.

For now, the numbers tell a simple story: life insurance is being used in ways it was not originally built for. Whether the industry adjusts or buyers change their expectations will determine how durable the next phase of growth really is.