Summary of this article
Nearly half of life insurance policies lapse early due to mis-selling issues.
Customers discontinue plans when promised benefits differ from actual policy features.
High premiums and financial stress make long-term traditional plans unaffordable.
Choosing pure term insurance avoids lapsation risks and reduces long-term costs.
Life insurance is a financial necessity. A report from June 2025 highlights that approximately 49 per cent of life insurance policies are discontinued within the first five years.
Mis-selling is a key trigger for early exits, and our complaint data shows it clearly. There are several reasons why many policyholders stop paying premiums, and their policies lapse. Let us see why.
Gap Between What Is Promised And What Is Delivered
“Most first-year lapses happen when there is a gap between what was promised and what the policy actually does. Customers realise that a ‘short-term investment’ is actually a long-term life plan with rigid premiums, or that returns are not what the seller projected. Add income stress or a job loss, and the easiest bill to drop becomes the insurance premium,” says Shilpa Arora, co-founder and COO, Insurance Samadhan.
Misselling: A Key Reason Why Policies Are Discontinued
Insurance mis-selling is a key concern, and many are sold policies that do not fit their needs. Endowment life policies, which combine insurance and investment, are sold to policyholders instead of term plans, which provide pure life insurance coverage. However, these policies are pushed by insurance agents as they have high commissions. Unit Linked Insurance Plans (ULIPs) are also a widely mis-sold cum insurance product.
“Mis-selling is a key trigger for early exits, and our complaint data shows it clearly. Cases where policies are sold as fixed deposits (FDs), loans, or guaranteed high-return products lead to disappointment as soon as the first statement arrives, and many customers just stop paying,” says Arora.
Basically, they realise their mistake and exit to cut their losses. Lack of proper need-based advice and poor post-sale service also push people to walk away instead of staying invested or seeking correction.
Affordability Is A Concern
Term plans are cheap. Endowment plans are not. Sometimes the annual premium can be too high, and policyholders may find it difficult to pay.
Affordability is a growing concern. “With higher living costs and rising premiums, many households are forced to choose equated monthly instalment (EMI) and groceries over long-term cover, especially when they don’t fully understand the consequences of letting a policy lapse. We see this very starkly among those facing job loss or steep renewal hikes – they are not unwilling to be insured, they are simply financially stretched,” adds Arora.
What You Should Do
Avoid any product that mixes insurance and investment. Instead, buy a term policy which gives you a higher coverage ( a thumb rule is 10 times your annual income) and invest the rest in diversified mutual funds. This way, you will not be locked into products that have high costs and moderate returns.
