Buying an insurance cover is one thing, and maintaining it is another. There are scores of policyholders who don’t think for a moment before buying a life insurance (or medical policy) cover, but fail to continue the same after a couple of years for a variety of reasons.
As one would expect, those policy holders stand to lose their insurance cover once they stop paying premium. And unless you move to another insurer – your previous premiums would go down the drain.
The proportion of policyholders who continue their policy is known as persistency ratio. So, if out of 100 policy holders who signed up for a policy in the first year – if only 70 continue to pay premium after 3 years –the persistency ratio reduces to 70 percent.
Several policy holders let their policies lapse because of fault in their policies or sometimes because of failing to understand different clauses of their policies. Experts suggest there are an array of reasons for this. Some people realise later that they were mis sold a policy, while others can’t afford to pay premium after a few years and some of them simply forget to renew the policy.
Kapil Mehta, Co-founder of Secure Now Insurance, says the discontinuation of policy happens because of three key reasons. “First, the insurance was mis-sold in the first place. Second, the policyholder's personal financial situation is changed and now they may not be able to pay future premiums. This happened with several policies during the pandemic. Third, people just forgot to renew. This is more common than what one would expect,”
“In health insurance, this can happen when policy holders choose another plan and don’t bother to port their policy. Else, some policy holders don’t just like the policy or they are undergoing some financial crisis that prevents them from paying the premium,” says Abhishek Misra, CEO of Bonanza Insurance Broker.
Persistency ratio (median in %)
| Year | 49 months | 61 months |
| 2018-19 | 45 | 37.8 |
| 2019-20 | 46.4 | 37.6 |
| 2020-21 | 51 | 39.4 |
(Source: Handbook on Indian Insurance Statistics)
Adverse impact of policy lapse
There are no prizes for guessing that discontinuation comes at a huge cost. Let us suppose that you surrender a traditional policy before even paying three premiums, you would not get anything back.
Even after three premiums, the policy is attached a surrender value and you become eligible to get some refund, but the penalty is high.
Besides this, if you intend to keep the policy without having to pay premium, the sum assured could reduce to a paltry 10 percent or even 5 percent in some cases.
How to avoid cancellation?
Experts advise that the solution to avoid cancellation is to make provision for insurance premium for several years in future instead of just thinking about first or second year. “Although one can even surrender the policy when you don’t wish to continue. But that is not the way to go ahead. That way, you lose out on protection as well as financial benefits,” Mr Misra says.
There is no denying the fact that policyholders must ensure to pay premiums on time, for which auto debit is a good and reliable option.
Naval Goel, Founder & CEO, PolicyX.com says, “An auto-debit facility is quite common which reduces the hassle of making the payment as it happens automatically. And if a policyholder finds any plan insufficient after a period of time especially because of the insured amount then instead of cancelling, they can supplement the existing plan with a new plan. It not only increases the sum insured, but you also get multiple benefits of having term insurance plans from different companies.”
Also, another way to prevent lapses is to have a good sales process. The policyholder must discern the costs and benefits of insurance before buying it. “The sales illustration is the best document for this. Sales promises or comments are valid only if they are reflected in the illustration. That's why studying this document is quite important,” Mr Mehta from Secure Now advises.
It is vital to make the right selection at the time of buying a term plan and even if someone miss sold the policy, try to to cancel the policy during the freelook period, and buy a better one from another insurer.