Why More Indians Are Cashing Out Life Insurance Early: IRDAI, RBI Reports Flag Mis-Selling Concerns

The latest annual report by the Insurance Regulatory and Development Authority of India (IRDAI) once again highlights that mis-selling in the life insurance sector remains a serious problem in the country. Many insurance products are still being sold without proper disclosure of their terms, conditions, or whether they are suitable for the customer. Despite repeated warnings from regulators, the issue continues to affect a large number of policyholders.

What Is Insurance Mis-selling?

Insurance mis-selling happens when an agent or insurer sells a policy that does not match a customer's needs or does so using false, misleading, or incomplete information. This is not a minor error. Under existing regulations, insurance advice must be based on a customer's financial situation, goals, and risk profile. When this basic requirement is ignored, it amounts to mis-selling.

How Insurance Mis-selling Affects Policyholders?

The impact of mis-selling can be severe. Policyholders may end up paying high premiums for years for a product that offers little real benefit or fails to provide coverage when it is most needed. If they choose to exit the policy early, they often face heavy losses due to surrender charges and hidden fees.

For example, a person may pay for a health or life insurance policy for several years, only to discover later that a crucial claim is rejected because of an exclusion that was never clearly explained. Such situations can cause serious financial strain and emotional stress for families.

Insurance Mis-selling In India: What The Data Shows

The Reserve Bank of India's Financial Stability Report 2025 offers deeper insight into how the insurance system is functioning. At first glance, the data appear positive, as life insurance payouts have risen sharply in recent years. Total benefits paid by life insurers increased from around Rs 4 lakh crore in 2020-21 to Rs 6.3 lakh crore in 2024-25.

However, a closer look reveals a worrying trend. A growing portion of these payouts is coming from policy surrenders, early exits, and withdrawals, rather than policy maturities. In simple terms, more policyholders are leaving their insurance plans early, often at a financial loss, because they were victims of mis-selling.

The report highlighted that policyholders tend to apply for early payouts because policies are often sold without proper explanation or suitability checks. Customers buy products they cannot afford long-term or that do not match their needs. When they realise the high premiums, low returns, or hidden charges, they surrender or withdraw early, resulting in payouts driven by exits, not policy maturity.

Commenting on this data, writer and financial expert Monika Halan noted on X, formerly Twitter, that India's insurance system appears to favour insurers and their distribution networks over customers. She pointed out that many policyholders are effectively trapped by commission-driven sales practices used by banks and agents.

While such criticism has long existed in anecdotal form, recent data on commissions provides stronger evidence of a structural problem, particularly among private sector insurers in both life and non-life insurance. The findings raise fresh concerns about whether insurance products in India are truly being sold in the best interests of consumers.