Page 111 - GSTL_7th May 2020_Vol 36_Part 1

2020 ]MAX LIFE INSURANCE CO. INDIA LTD. v. COMMR. OF C.E. & S.T., LTU, NEW DELHI 69
The meaning of the term ‘surrender’ has been given in IRDA’s Circular No.
032/IRDA/Act-1/Dec-2005, dated 21-12-2005, which states that surrender
means ‘terminating the contact once and for all’ and that “surrender charg-
es are charges levied on the ULIP fund at the time of surrender of the con-
tract”.
26. The “surrender charges” are based on and are calculated as a per-
centage of annual target premium; and gets reduced with every passing year.
Surrender charge :
This charge is calculated as a percentage of first year ATP and shall be
levied at the following rates on the Fund Value at the time of effecting sur-
render of the Policy :

If the Policy is surrendered Surrender Charge (as % of first
year ATP*)
In the 1st Policy year Surrender is not allowed
In the 2nd Policy year 40%
In the 3rd Policy year 30%
In the 4th Policy year 20%
In the 5th Policy year 10%
In the 6th Policy year and onwards Nil
* Annual Target Premium
As evident from above, if the ULIP policy is surrendered in the 6th policy year or
thereafter, there is no loss either to the insurer. But if the ULIP policy is surren-
dered in the second, third, fourth or fifth year, the fund value would be reduced
by percentage point shown against the column. This reduced amount is an in-
come of the insurer, charged from the ULIP policyholder in the form of surren-
der charges, to cover the expenses, which the company, though incurred at the
time of beginning of the ULIP policy, could not recover because of IRDA capping
in the initial years and later due to premature closure of the policy by the policy-
holder.
27. The surrender charges have a nexus with the management of in-
vestment under ULIP and other policies.
The surrender charges are nothing but unrecovered expenses as on the
date of surrender, which the insurance companies (i.e. M/s. Max) had already
incurred towards procurement, administration of the policy and incidental there-
to. The reason because of which such expenses remain unrecovered is due to the
capping policy of the IRDA which restrain and restrict the insurance companies
to recover the total expenses in the initial year of the policy, as a result of which,
the said expenses, even though incurred at the initial stages of the policy, are
spread over the policy period and are recovered in the first 5-6 years of the policy
period, in order to comply with the IRDA’s instructions and guidelines, and cap-
ping policy.
The fact that the said charges, as explained earlier are in the nature of
procurement, administration of the policy and incidental thereto, clearly show
that the same have a prima facie nexus with the management of investment under
ULIP policies.
28. Learned Authorised Representative further submitted that surren-
der charges levied at the time of foreclosure of loan are similar. He relied on the

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