How Indians gift Rs 5,000 crore to LIC every year

NEW DELHI: Indians love buying insurance, not so much for the cover but as an investment to get tax benefits. However, close to a fourth of the savings that goes into regular premium investment policies goes waste.

This phenomenon, called the persistency ratio in insurance parlance, broadly measures the proportion of policyholders who keep funding their insurance product beyond the first year. Most life insurance companies have at least 25% of policyholders dropping out after the first year.

In case of a lapse within a year the policyholder loses almost all of his money as the insurer books all its costs, including commission, upfront in the first year.
In 2016-17, LIC sold Rs 22,178.15 crore worth of regular premium policies, which is 44 per cent of what the entire industry sold. Extrapolating the 25 per cent lapse ratio to this means premium worth over Rs 5,000 crore lapsed for LIC alone.
One big reason for this is the mis-selling of policies. In the West, life insurance companies tackle this by incorporating a 'clawback clause' in their contract with their agents. They recover a part of the commission paid to agents if the policy lapses.
That's not all, many of those who pay all their dues till the end do not inform their families about the policies they have invested in. The result is more than Rs 15,000 crore of investor money is lying unclaimed with insurers.

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