Term insurance, the most effective and cheapest instrument for meeting an individual’s financial goals, is considered a waste of money by most Indians.
According to a report from Espirito Santo Securities, term insurance policies have the highest lapsation rate.
The lapse rate in terms of premium was 19% for term insurance policies, 11% for Unit-Linked Insurance Plan (ULIPs), 6% for par-whole life, par-endowment, 4% for non-par endowment, and around 2% for pension plans.
Term insurance policies are low ticket policies that offer protection for a specific period of time. It pays a benefit to nominee only if the policyholder dies but in case the policyholder survives the tenure of the policy, nothing is paid to him or to the nominee.
Contrary to the conventional wisdom, people want returns from their insurance a policies and see term insurance as a waste of premium, said the report titled a Life Insurance Thematic: Lets not give up on life yet.
The study said that there is a direct correlation between lapsation of insurance policies and the age of the policyholder. Young people (18-27 years of age) uncertain of their cash flows were seen lapsing their policies more than people between 43-57 years of age. Also, lapsation decreased as the size of the policy increased.
Almost 50% of the term insurance policies bought lapses in the initial two years. This is largely because individuals see life insurance as savings tool rather than a protection tool.
Another reason is that the agents earn low commission in case of term insurance plans, compared with traditional plans and ULIPs. So the follow up from agents is low leading to high lapses.
Agents earn 15% of the premium as first year commission on term insurance plans (which are low ticket sized) compared with 35-40% first year commission in case of ULIPs and endowment plans, which have a higher ticket size.