Insurance Act, 1938 – s.113 – Life Insurance Policies – ”Surrender Value”– Appellant obtained life insurance policy in November, 1993 – Sum insured was Rs.75,000/- – Term of the policy was twenty five years – Policy envisaged the payment of quarterly premium of Rs 775/-, spread over hundred quarters during the term of the policy – Last premium was payable in August, 2018 and the policy was to mature in November, 2018 – In 2001, the appellant took loan of Rs.15,000/- by pledging the policy – In August, 2001 the appellant stopped paying the premium and applied for the refund of the surrender value – Corporation offered surrender value of Rs.2268/-, after deducting the loan amount and outstanding interest – Complaint filed by the appellant – Allowed by the District Consumer Forum and State Commission – Reversed by National Commission – On appeal, held: 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 the present case) that their surrender value will be equal to the total amount paid as premium – This expectation is misconceived – 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 – Premia are fixed by the insurer on the basis of expected mortality rates – Mortality rates increase with age – 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 – 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 value – 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 – 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 deducting 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 – Factor of 32.92% has been duly explained on the basis of the actuarial table governing surrender values – What was payable to the insured was computed after deducting the loan which was taken against the policy together with the outstanding interest – Method by which the computation was carried out was in accordance with the accepted and duly approved formula and was consistent with the provisions of s.113 of the 1938 Act as they stood at the material time as well as condition 7 of the policy document – Life Insurance Corporation Act, 1956 – s.49(2) – Life Insurance Corporation Regulations, 1959 – Regulation 18(2) .
The appellant obtained life insurance policy in November, 1993. The sum insured was Rs.75,000/-. Term of the policy was twenty five years. Policy envisaged the payment of quarterly premium of Rs 775/-, spread over hundred quarters during the term of the policy. Last premium was payable in August, 2018 and the policy was to mature in Nov. 18. In 2001, the appellant took loan of Rs.15,000/- by pledging the policy. In August, 2001 the appellant stopped paying the premium and applied for the refund of the surrender value. The Corporation offered surrender value of Rs.2268/-, after deducting the loan amount and outstanding interest. Appellant filed complaint before the District Consumer Forum, which was allowed. The State Commission affirmed the said decision, which was reversed by National Commission in revision. Hence, the present appeal.
Dismissing the appeal, the Court
HELD: 1.1 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. 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, 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 value. 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. In computing the surrender value of any subsisting bonus, reference ought to be made to the stipulations contained in Section 113, Insurance Act, 1938. 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. [Paras 11, 13 and 16] [220-D-G; 221-C; 223-B-C]
1.3 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/-. 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 was payable to the insured was computed after deducting the loan which was taken against the policy together with the outstanding interest. The method by which the computation was carried out was in accordance with the accepted and duly approved formula. It was consistent with the provisions of Section 113 of the Act as they stood at the material time as well as condition 7 of the policy document. [Paras 17-20] [223-D-H; 224-A-E]
Branch Manager, LIC of India v. A Paulraj (1969) 2 CPJ 69 – referred to.
“Modern Law of Insurance in India”, N.M Tripathi Private Limited, First Edition (1978) – referred to. Charles C. Bulingham v. Charles M. Crouse 228 U.S.
459 (1913); In re McKinney 15 Fed. Rep. 535, 537 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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