Early exits overtake maturity payouts as mis-selling concerns rise in life insurance sector, shows RBI data

Recent data from the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority of India (IRDAI) point to a significant shift in how life insurance benefits are being paid out in India. An increasing share of payouts is now being driven by early exits—such as policy surrenders and partial withdrawals—rather than by policies running their full course to maturity. Currently, around 37% of total benefits paid to life insurance policyholders arise from early exits, highlighting a growing tendency among customers to encash policies before the intended term, often at a financial disadvantage.

This change has drawn the attention of regulators and industry analysts alike. According to the RBI’s Financial Stability Report 2025, overall life insurance payouts have expanded substantially, rising from about Rs 4 lakh crore in 2020–21 to Rs 6.3 lakh crore in 2024–25. However, the composition of these payouts has altered markedly. Only about 35% of benefits now come from policy maturity, while death claims account for just 7.5%. The remainder largely reflects premature exits, underlining concerns about product suitability and customer outcomes.

Insurance mis-selling

Regulators have repeatedly flagged mis-selling as a structural issue in the life insurance market. Policies are often sold without adequate disclosure of costs, lock-in periods, surrender penalties, or long-term suitability. Personal finance experts have argued that commission-driven sales channels, particularly bancassurance and agency networks, can incentivise the sale of complex or unsuitable products, leaving policyholders feeling locked into arrangements that do not align with their financial needs.

 

Industry analysts also point to the underlying business model as a contributing factor. Traditional life insurance products are typically front-loaded with high commissions in the first year, encouraging distributors to focus on new sales rather than long-term servicing or retention. Data trends suggest that insurers prioritise acquiring fresh business, while policy persistency and customer value over the full term receive less emphasis. This dynamic helps explain the sharp rise in surrender rates, especially after the initial policy years.

Cost structure

A closer examination of cost structures reinforces this picture. Public sector life insurers have generally maintained tighter control over expenses, with commission payouts remaining relatively stable even as premium collections have grown. Their operating models rely more on established, lower-cost distribution networks. In contrast, private life insurers have recorded a sharp increase in commission expenses since 2022–23, along with higher operating costs, reflecting a heavier dependence on aggressive and often expensive sales channels.

The link between commission intensity and early exits appears strong. High upfront commissions can distort incentives, pushing sales volume over policy quality and long-term suitability. RBI data and expert commentary suggest that these incentives shape sales behaviour, contributing directly to higher surrender and withdrawal rates across the sector.

Non-life insurance space

Similar patterns are visible in the non-life insurance space. Public sector general insurers continue to operate with stable, though relatively high, expense bases supported by legacy distribution systems. Private non-life insurers, meanwhile, have pursued growth through more aggressive expansion strategies, resulting in rising commissions and operating costs that may eventually pressure underwriting margins.

Taken together, these trends raise broader questions about consumer protection, regulatory effectiveness, and the sustainability of prevailing insurance business models. The growing share of benefits paid out before maturity, coupled with elevated commissions and aggressive sales practices, suggests that improving product transparency, aligning incentives with customer outcomes, and strengthening persistency norms will be critical to restoring trust and ensuring long-term stability in India’s insurance sector.