High Lapse Rate of Life Insurance Policies in India and Why It Matters

Recently, my house help asked me to check her life insurance policy. Unfortunately, the policy had lapsed. I also casually checked the amount she would have to pay to revive it. With the premiums and the interest due, the total amount to revive the policy came to nearly ₹100,000. The question for the house help now was whether to pay the overdue amount of ₹100,000 or let go of what she had already paid. She had only one choice. She had to forego the amount already paid, as there was no way she could have paid ₹100,000 in one go to revive the policy. That made me wonder how many life insurance policies lapse each year, and what must be happening to the money insurance companies receive in premiums while the policies are still in force?

Lapsed policies
Studies show India has high early lapse rates — 12-18% policies lapse in the third to seventh year. Conservative estimates suggest that 49% of policies are discontinued within the first five years. Lapses are higher for term and endowment plans.

The total number of new individual life policies issued annually is around 25-30 million. 

And yet, India’s insurance penetration rate remains at a paltry 3.7%. Insurance penetration for the life insurance industry, in fact, declined from 2.8% in 2023-24 to 2.7% during 2024-25. The penetration rate is generally driven by growth in premiums collected. It does not take into account lapsed policies. If the penetration number is calculated net of lapsed policies, it could be even lower.

At a time when the government and insurance companies are making all-out efforts to bring more people, especially those in the low-income bracket, under insurance coverage, such a low penetration rate is alarming. The purpose of life insurance - term or endowment - is ultimately to offer some kind of social security to the insured. However, discontinuation of policies, for whatever reasons, defeats the very purpose of the ‘insurance for all by 2047’ drive.

Why do policies lapse?
Policies lapse when the insured misses a premium payment. Premiums are often missed due to financial difficulties such as job loss, debt, and hospitalisation. There are cases in which the insured finds the premium too high or considers the policy a worthless ‘expense’ because no return (interest or dividends) is received on it. This typically happens after the policy has run for a couple of years. And the reason behind this is mis-selling, a mismatch between the product and customer expectations and/or inadequate information about the policy and the consequences of non-payment of future premiums being shared with the insured by intermediaries. Further, the intermediaries often do not care to remind the insured of the premium due date because commissions are low.

How can the issue of lapsed policies be tackled?
That the intermediaries need to provide much more information to the insured cannot be emphasised enough. Unfortunately, more often than not, they themselves are not well-informed. Thankfully, technology has partly resolved this issue by making a lot of information available online and by facilitating comparisons among products. However, how many people can and do access such online information remains a question. But certainly the intermediaries can. They need to update themselves as people, in any case, prefer to consult human beings on money matters even if they have accessed information online. Individual intermediaries or agents have been, and continue to be, the largest and the most effective point of contact in insurance. This further stresses the need for individual intermediaries to be well-informed about the details of the products that they wish to sell and marry them to the customer needs.

Additionally, can there be a minimum qualifying criterion for appointing individual intermediaries, just as the mutual fund industry has a qualifying test for mutual fund agents? And once appointed, they should also be required to periodically update their knowledge. Some kind of licensing and renewal of licence.

The regulator can also ask insurance companies to highlight a few of the most significant conditions in the policy document issued, just as the credit card issuing companies have been asked to highlight the most important conditions in the literature issued along with the credit card. In the notice for premiums to be paid, companies can include the consequences of lapsed policies and their impact on the insured, with the focus on maximising renewals. 

Renewing the policy
Almost all insurance companies offer a grace period of 15 days to one month after the due date for premium payments. Some policies, especially whole-life ones, allow surrendering the policy and receiving the built-up cash value, with surrender charges deducted, if the insured wishes to discontinue the policy. Term life policies offer death benefits only during the currency of the policy as the premiums are considered to have been spent to cover the life for the years for which premiums have been paid. 

The premiums already paid on lapsed endowment policies, however, are not returned by insurance companies. The insured often realises that the policy has lapsed only after several years, most likely when a claim is made and rejected because the policy has lapsed. Or even if she realises it earlier, she is helpless as the amount to revive the policy is too large.

The insured has two options to revive the policy. One, to pay up the premiums not paid along with interest, which is usually in the range of 12-18%, and even a penalty; or to forget about the lapsed policy and buy a new one because the premium amount to be paid appears to be smaller than the amount required to revive the policy. In both cases, the insured stands to lose, particularly if it is a whole-life policy bought to secure the family’s future. 

One-time settlement?
Today, when the authorities consider life and medical insurance as a social security measure, and the flexibility technology has provided, insurance companies need to consider offering greater flexibility in reviving lapsed policies, too. They have been undertaking drives to revive lapsed policies from time to time. There is, however, no incentive provided in these drives.

Can the revival of the lapsed policy, for instance, be treated like the non-performing asset of a bank and be restructured? This may require insurance companies to forego interest and penalties, perhaps even some part of the premium due. Cases may also require reducing future premium amounts and extending the number of years for which premiums will have to be paid. In all deserving cases, like the house help’s case above, offering such restructuring would be worthwhile. The insured would not have to forego the amount already paid, would have a lower, more convenient premium to pay going forward, and would continue to be covered. The insurance companies, too, would not have to lose a customer. In case the insured does not wish to revive the policy, as a one-time measure, all premiums paid should be returned, with a token penalty if necessary, after asking the insured one final time whether they would wish to revive the policy with the conditions relaxed as suggested above. 

Cases of non-payment of premiums are best viewed with empathy, especially when insurance is the only social security available to lower-income groups. The government should treat money involved in lapsed policies as unclaimed financial assets and bring them under the ‘aapka paisa aapka adhikar’ campaign. This would increase insurance penetration in a far more meaningful way.