Case: ANANDRAO RAMCHANDRA SALUNKE Vs. LIFE INSURANCE CORPORATION OF INDIA

company in advance to make up the deficiency in later premiums to cover the annual cost of insurance, instead of being retained by the assured and paid by him to the company in the shape of greatly increased premiums, when the risk is greatest. It is the net reserve required by law to be kept by the company for the benefit of the assured, and to be maintained to the credit of the policy. So long as the policy remains in force the company has not practically any beneficial interest in it, except as its custodian, with the obligation to maintain it unimpaired and suitably invested for the benefit of the insured. This is the practical, though not the legal, relation of the company to this fund. Upon the surrender of the policy before the death of the assured, the company, to be relieved from all responsibility for the increased risk, which is represented by this accumulating reserve, could well afford to surrender a considerable part of it to the assured, or his representative. A return of a part in some form or other is now usually made… 15. The issue before the Court is as to whether the provisions of Section 113 of the Act and condition 7 of the policy document were duly observed by the insurer. Section 113(1) is in two parts: (i) A policy of life insurance under which the whole of the benefits become payable either on the occurrence of a contingency which is bound to happen or at fixed intervals, acquires a surrender value if all the premiums have been paid for at least three consecutive years. The surrender value of any subsisting bonus already attached to the policy is to be added to the guaranteed surrender value; (ii) Every such policy which is issued by an insurer must show the guaranteed surrender value of the policy at the close of each year after the second year of its currency or at the close of each period of three years throughout the currency of the policy. 16. In computing the surrender value of any subsisting bonus, reference ought to be made to the stipulations contained in Section 113. The first proviso to Section 113(1) provides that the requirement of the addition of the surrender value of the bonus attaching to the policy at surrender is deemed to have been fulfilled where the method of calculating the guaranteed surrender value makes provision for the surrender value of the bonus attaching to the policy. The second proviso stipulates that the requirement of showing the guaranteed surrender value on a policy is deemed to have been complied with where the insurer shows on the policy the guaranteed surrender value by means of a formula which is accepted by the authority as satisfying the requirements under the third proviso. The requirement of showing the guaranteed surrender value shall not take effect until six months have expired from the date of publication of the notification in the Official Gazette. 17. In exercise of the powers conferred by Section 49(2) of the Life Insurance Corporation Act, 1956, the Central Government notified the Life Insurance Corporation Regulations 1959 . Regulation 18(2) empowers the Executive Committee to accept the surrender of any insurance or annuity and to purchase or redeem any insurance or annuity and to waive the forfeiture of any insurance on such terms as the Executive Committee may deem fit. The respondent has placed on the record a copy of the Minutes of the Seventy-seventh meeting of the Executive Committee of the Life Insurance Corporation of India held on 19 August 1959. At that meeting, the Executive Committee approved of the proposed scale of surrender values. The note on the basis of which the approval was granted has also been annexed. 18. We have considered the basis of the computation which has been placed before the Court and which has been extracted in the earlier part of this judgment. Condition 7 of the policy document specifically provides that the surrender value is equal to 30% of the total premiums paid, excluding premiums for the first year and all extra premiums and/ or additional premiums for accident benefits that may have been paid. The paid up value of the policy on that basis was computed by taking into account the premiums that were paid by the insured. The paid up value of the policy worked out to Rs 23,250. 19. The real dispute in the present case arose because of the claim of the appellant that he was entitled to the entirety of the bonus and not 32.92% of the total bonus that would have accrued had the policy continued to its term of maturity. The factor of 32.92% has been duly explained on the basis of the actuarial table governing surrender values which has been placed on record. The vested bonus which accrued, stood at Rs 42,187 at the rate of Rs 562.5 per Rs 1,000, according to the bonus chart for endowment policies as on 31 March 2001. There was no error on the part of the respondent in computing the surrender value of the subsisting bonus, on the basis on which it has been computed. The surrender value of the subsisting bonus attached to the policy cannot be the bonus which would have been payable had the policy continued to its full term. In deducing the surrender value of the bonus which was payable to the appellant, the respondent applied the surrender value factor of 32.92% to the total paid up value of the policy. The total paid up value comprised of the paid up value (Rs 23,250) and the vested bonus (Rs 42,187). Hence, the total paid up value of the policy was Rs 65,437 to which the surrender value factor of 32.92% was applied. This resulted in a surrender value of Rs 21,542. What is payable to the insured was computed after deducting the loan which was taken against the policy together with the outstanding interest.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]11. There are popular misconceptions about the concept of surrender value in the sphere of life insurance. In a policy of fire insurance, a policy holder has no expectation of a surrender value. In contrast, a holder of a policy of life insurance may believe (as the appellant in this case does) that their surrender value will be equal to the total amount paid as premium. This expectation is misconceived. Simply put, life insurance operates on the basis of the law of averages. Premium is collected from all policy holders in order to create a common fund. Payouts from the fund are received only by those who suffer the peril which is insured. The economic loss suffered by few is divided amongst many. Premia are fixed by the insurer on the basis of expected mortality rates. Hypothetically speaking, if mortality rates of all individuals were to be equal irrespective of age and everyone paid the same premium, the discontinuance of a policy during its term would not entitle the insured to a surrender value since the common fund would be depleted on a regular basis. In reality, the mortality rates increase with age. Actuarial tables provide a guide to the insurer. Hence, when an insurer initially collects premium from individuals of a younger age, the amount it collects is higher than the amount it pays out towards claims. The difference between them is the reserve. Thus if a policy holder wishes to discontinue a policy before the end of the term, they will only be entitled to their share of the reserve as a surrender value13. Since the value of the reserve is the amount which the insurer collects as premium from policy holders from which it deducts the amount of the claims it pays out, the surrender value payable to a policy holder can never be equal to the premia paid by them.16. In computing the surrender value of any subsisting bonus, reference ought to be made to the stipulations contained in Section 113. The first proviso to Section 113(1) provides that the requirement of the addition of the surrender value of the bonus attaching to the policy at surrender is deemed to have been fulfilled where the method of calculating the guaranteed surrender value makes provision for the surrender value of the bonus attaching to the policy. The second proviso stipulates that the requirement of showing the guaranteed surrender value on a policy is deemed to have been complied with where the insurer shows on the policy the guaranteed surrender value by means of a formula which is accepted by the authority as satisfying the requirements under the third proviso. Therequirement of showing the guaranteed surrender value shall not take effect until six months have expired from the date of publication of the notification in the Official Gazette17. In exercise of the powers conferred by Section 49(2) of the Life Insurance Corporation Act, 1956, the Central Government notified the Life Insurance Corporation Regulations 1959 . Regulation 18(2) empowers the Executive Committee to accept the surrender of any insurance or annuity and to purchase or redeem any insurance or annuity and to waive the forfeiture of any insurance on such terms as the Executive Committee may deem fit. The respondent has placed on the record a copy of the Minutes of the Seventy-seventh meeting of the Executive Committee of the Life Insurance Corporation of India held on 19 August 1959. At that meeting, the Executive Committee approved of the proposed scale of surrender values. The note on the basis of which the approval was granted has also been annexed18. We have considered the basis of the computation which has been placed before the Court and which has been extracted in the earlier part of this judgment. Condition 7 of the policy document specifically provides that the surrender value is equal to 30% of the total premiums paid, excluding premiums for the first year and all extra premiums and/ or additional premiums for accident benefits that may have been paid. The paid up value of the policy on that basis was computed by taking into account the premiums that were paid by the insured. The paid up value of the policy worked out to Rs 23,25019. The real dispute in the present case arose because of the claim of the appellant that he was entitled to the entirety of the bonus and not 32.92% of the total bonus that would have accrued had the policy continued to its term of maturity. The factor of 32.92% has been duly explained on the basis of the actuarial table governing surrender values which has been placed on record. The vested bonus which accrued, stood at Rs 42,187 at the rate of Rs 562.5 per Rs 1,000, according to the bonus chart for endowment policies as on 31 March 2001. There was no error on the part of the respondent in computing the surrender value of the subsisting bonus, on the basis on which it has been computed. The surrender value of the subsisting bonus attached to the policy cannot be the bonus which would have been payable had the policy continued to its full term. In deducing the surrender value of the bonus which was payable to the appellant, the respondent applied the surrender value factor of 32.92% to the total paid up value of the policy. The total paid up value comprised of the paid up value (Rs 23,250) and the vested bonus (Rs 42,187). Hence, the total paid up value of the policy was Rs 65,437 to which the surrender value factor of 32.92% was applied. This resulted in a surrender value of Rs 21,542. What is payable to the insured was computed after deducting the loan which was taken against the policy together with the outstanding interest.