CHAP 14: HI LIFE LAWS

Variable Contracts

1. An insurer issuing variable life insurance or annuities must establish one or more separate accounts in which to allocate the assets for these types of contracts. 2. Assets allocated to a separate account must be valued at their market value on the date of valuation. 3. No transfer of assets may be made between any of an insurer's separate accounts unless such transfer is for the purpose of establishing the account or to support the contracts to which the separate account pertains. 4. Variable contracts: a. Must contain a statement of the procedures to be followed by the insurer in determining the dollar amount of such variable benefits. b. Must state that the dollar amount of variable benefits will vary to reflect investment experience. c. May include an incidental benefit provision for payment on death during the deferred period.

Annuities

1. DISCLOSURE STANDARDS - In personal meetings between an applicant and producer, both the buyer's guide and disclosure document shall be given to the applicant at or before the time application. Other than in a personal meeting, both the buyer's guide and disclosure document shall be sent to the applicant no later than 5 business days after the completed application is received by the insurer. This requirement can be satisfied by direct mail solicitation or by having such documents on the insurer's website. a. A solicitation for an annuity contract provided other than in a personal meeting shall include a statement that the prospective applicant may contact the insurance division for a free buyer's guide. b. If the buyer's guide and disclosure document are not provided at or before the time of application, a free-look period of no less than 15 days shall be provided for the applicant to return the annuity contract without penalty. c. The disclosure document shall include a description of the contract and its benefits, which shall emphasize its long-term nature. 2. REPORT TO CONTRACT OWNERS - Insurers must provide each annuitant an annual report that contains at least the following information: a. The beginning and ending dates of the current report period. b. The accumulation and cash surrender value at the end of both the previous and the current report period. c. The total amounts that have been credited, charged to the contract value, or paid during the current report period; and d. The amount of any outstanding loans as of the end of the current report period. 3. SUITABILITY - In recommending to a consumer the purchase or exchange of an annuity, the insurance producer shall have reasonable grounds for believing that the recommendation is suitable for the consumer. This suitability is based on the consumer's suitability information about the consumer's investments, other insurance products, financial situation, and needs. a. In the case of an exchange or replacement of an annuity, suitability must take into consideration whether: 1) The consumer will incur a surrender charge. 2) Be subject to the commencement of a new surrender period. 3) Lose existing benefits such as death, living, or other contractual benefits; or 4) Be subject to any fees and charges. 5) The consumer would benefit from product enhancements and improvements; and 6) The consumer has had another annuity exchange or replacement within the preceding 36 months. b. Neither an insurance producer nor an insurer shall have any obligation to a consumer related to any annuity transaction if: 1) No recommendation is made. 2) A recommendation was made based on materially inaccurate information provided by the consumer. 3) A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended; or 4) A consumer decides to enter into an annuity transaction that is not based on either the insurer or producer's recommendation. c. At the time of sale, the producer shall make a record of any recommendation he/she made and obtain the consumers signed acknowledgment documenting: 1) The customer's refusal to provide suitability information, if applicable; and 2) That the annuity transaction is not recommended if the consumer enters into annuity transaction that is not based on the producer's or insurer's recommendation. 4. PENALTIES - If a violation occurs because of an insurer's or producer's action or inaction, the Commissioner may order: a. The insurer take reasonably appropriate corrective action for any consumer harmed by the violation. b. Any penalty be reduced or eliminated if corrective action for the consumer was taken promptly after a violation was discovered or if the violation was not part of a pattern or practice. 5. RECORDKEEPING - All records of information collected and transactions conducted for annuities must be maintained for 5 years after the transactions has been completed. An insurer may maintain documentation on behalf of an insurance producer.

Group Life

1. No group life insurance may be delivered in this state unless it meets the following requirements: a. A policy issued to an employer under which employer is the policyholder, insuring employees for the benefit of persons other than the employer. b. Where the premiums are to be shared by both the employer and employee, at least 75% of the eligible employees must elect to make the required contributions. c. Where the employer is paying the entire premium, the group policy must insure all eligible employees, except those who reject coverage in writing. d. The policy must cover at least 10 employees at date of issue. e. All group life policies must contain at a minimum a grace period of at least 30 days, a 2-year incontestability clause, insurability conditions (if any), adjustments for misstatement of age, beneficiary provisions and conversion rights. f. The employees eligible for insurance under the policy are all of the employees of the employer, or all of any class or classes thereof determined by conditions pertaining to their employment. The policy may provide that the term employees include: 1) The employees of one or more subsidiary or affiliated corporations. 2) The individual proprietor or partners, if the employer is an individual proprietor or a partnership. 3) Retired employees. g. No director of a corporate employer may be eligible for insurance under the policy unless such person is otherwise eligible as a bona fide employee of the corporation by performing services other than the usual duties of a director. The same applies to a sole proprietor of a sole proprietorship or a partner or partners of a partnership. h. An insurer may exclude or limit the coverage on any person as to whom evidence of individual insurability is not satisfactory to the insurer. i. The amounts of insurance under the policy must be based upon some plan precluding individual selection either by the employer or trustees. 2. Any person insured under a group life insurance policy may make an assignment of all or any part of the incidents of ownership under the policy and has the right to name a beneficiary. 3. CONVERSION ON TERMINATION OF ELIGIBILITY - If an individual loses group coverage because he/she terminates employment or because class of which he/she is a member loses eligibility, he/she shall be entitled to an individual policy, without evidence of insurability and without disability or other supplementary benefits. a. The application for the individual policy shall be made and the first premium paid to the insurer within 30 days after group coverage terminates. b. The individual policy shall be on any one of the forms then customarily issued by the insurer at the age and for the amount applied for, except that the group policy may exclude conversion to term insurance. c. The individual policy coverage amount shall not be in excess of the terminated coverage amount, nor less than $1,000 unless a smaller amount of coverage was provided under the group policy. This coverage amount will be reduced by the amount of any life insurance for which the individual becomes eligible under the same or any other group policy within 30 days after the group termination. d. The premium on the individual policy shall be at the insurer's then customary rate applicable to the form, coverage amount, the class of risk and attained age. 4. If a group life policy terminates for reasons other than termination of employment or loss of class eligibility, every person insured at the date of termination who has been insured for at least 5 years prior to the termination date will be entitled to have issued to him/her within 30 days of the termination date, and without evidence of insurability, an individual policy which will not exceed the smaller of the amount of insurance ceasing, or $10,000. 5. If a person insured under a group policy dies during the conversion period within which he/she would have been entitled to have an individual policy issued, the amount of life insurance which he/she would have been entitled to have issued under an individual policy must be payable as a claim under the group policy whether or not application for the individual policy has been made. 6. If an insured is not given notice of the conversion at least 15 days prior to the expiration date of the 30-day application period, the insured has an additional 15 days to exercise the conversion right.

Participation in Surplus

1. Participating policies must ascertain and apportion divisible surplus beginning no later than the 3rd policy year. 2. Dividends shall be: a. Payable in cash; or b. Applied to any one of the other dividend options as may be provided by the policy. 3. If any other dividend options are provided, the policy shall state which option shall be automatically used if the insured doesn't select an option at least 30 days after the dividend is to be paid. 4. Dividends may be considered cash payments even if deferred to a later date, not to exceed 6 years. Interest will be added to the dividend at a specified rate.

Credit Life

1. Credit life insurance and credit disability insurance may be issued only in the following forms: a. Individual term life insurance. b. Individual accident and health or sickness insurance. c. Group term life insurance. d. Group accident and health or sickness insurance. 2. The initial amount of credit life insurance may not exceed the total amount repayable under the credit transaction, which is the gross debt. 3. Where indebtedness is repayable in substantially equal installments, the amount of insurance may not at any time exceed the scheduled or actual amount of unpaid indebtedness, whichever is greater. 4. The total amount of periodic indemnity payable by credit accident and health insurance due to disability may not exceed the aggregate of the periodic scheduled unpaid installments of the gross debt, and the amount of each periodic indemnity payment shall not exceed the original gross debt divided by the number of periodic installments. 5. Credit insurance shall become effective on the date when the debtor becomes obligated to the creditor. 6. When evidence of individual insurability is required and such evidence is furnished more than 30 days after the date when the debtor becomes obligated to the creditor, the term of the credit insurance may be effective on the date on which the insurance company determines the evidence to be satisfactory. 7. The term of any credit insurance may not extend more than 15 days beyond the schedule when extended without additional cost to the debtor. If the debt is discharged due to renewal or refinancing prior to the final payoff date, the insurance in force shall be terminated before any new insurance may be issued in connection with the renewed or refinanced indebtedness. 8. When credit insurance is required for any indebtedness, the creditor must give the debtor written notice of the debtor's option to furnish the required insurance through existing policies of insurance owned by the debtor or through any insurer authorized in this state. 9. Penalties - In addition to any other penalty provided by law, any person, firm or corporation that violates an order of the Commissioner regarding credit life insurance transactions may be fined $250 for each violation that may be recovered in a civil action. If the violation is found to be willful, the fine may be up to $1,000.

Policy Clauses and Provisions

1. Protection of Beneficiaries from Creditors - The death benefit and the aggregate net cash value of any life and endowment policy (except group life insurance) and annuity contract payable to a spouse of the insured, or to a child, parent, or other person dependent upon the insured are exempt from debts or liabilities of the insured, except for premiums paid in fraud of creditors. 2. POLICY LOAN INTEREST RATE - The maximum policy loan interest rates are as follows: a. Not more than 8% per annum; or b. An adjustable maximum interest rate established from time to time by the insurer as permitted by law. The rate being charged shall be reduced whenever such reduction would decrease that rate by one-half per cent or more per annum. c. The rate of adjustable interest may not exceed the higher of the following: 1) The Moody's Corporate Bond Yield; or 2) The rate used to compute the cash surrender values under the policy during the applicable period plus 1% per annum. d. If the maximum rate of interest is determined as an adjustable maximum rate, the policy must contain a provision stating the frequency at which the rate is to be determined. e. The maximum rate for each policy must be determined at regular intervals at least once every 12 months, but not more frequently than once in any 3 month period. 3. SPOUSE'S RIGHTS a. Insurance under a group life insurance policy may be extended to insure the employees or members of such groups against loss due to the death of their spouses and dependent children. b. The spouse and dependent may be covered in amounts equivalent to the amount of coverage of the insured. c. Dependent - For this section 'dependent' means a child of the insured individual: 1) Under 18 years of age. 2) Under 23 years of age who is attending an educational institution and relying upon the insured individual for financial support; or 3) Regardless of age who is incapable of self-sustaining employment by reason of intellectual disability or physical handicap and is chiefly dependent upon the insured individual for support and maintenance.

Replacement

1. The purpose of replacement regulation is to: a. Regulate the activities of insurers and agents. b. Protect the interests of life insurance and annuity purchasers from the loss of benefits. c. Assure that the purchaser receives enough information to make an informed decision. d. Reduce the opportunity for misrepresentation. e. Establish penalties for failure to comply with the rules of replacement. 2. Replacement - Any transaction in which new life insurance or an annuity is to be purchased, and it is known, or should be known to the agent, that the existing contract(s) will be: a. Lapsed, forfeited, surrendered, or terminated. b. Converted to effect a reduction in the amount of existing insurance, or term of which the coverage would remain in force. c. Reissued with a reduction in amount so that substantial cash values are released. d. Assigned as collateral for a loan or subjected to substantial borrowing of loan values in single or multiple transactions. e. Converted into paid-up insurance, continued as extended term insurance, or another form of nonforfeiture benefit. 3. The following types of policies are exempt from state replacement regulations: a. Credit life insurance administered by group-type methods. b. Group life insurance policies. c. A change or conversion privilege is honored by the same insurer that issued the existing policy. d. A registered policy or contract. e. The policy is issued in connection with a pension, profit sharing, individual retirement account, or other benefit plan qualifying for an income tax deduction of premiums. f. Existing life insurance that is a non-convertible term life insurance policy that will expire in 5 years or less and cannot be renewed. g. Immediate annuities that are purchased with proceeds from an existing contract. h. Structured settlements. 4. If the applicant decides to replace a policy or policies, the replacing agent is required to read the Notice of Replacement aloud to the applicant and leave the applicant with a copy of all sales material. 5. The agent must provide the insurer with a copy of all sales material used. 6. Insurer's duties include: a. Requiring with or as a part of each application for life insurance or an annuity a signed statement by both the applicant and the producer as to whether the applicant has existing policies or contracts. b. Making certain that all replacement actions are in compliance with state regulations. c. Notifying each insurer whose insurance is being replaced within 5 working days and, upon request, furnishing a copy of any proposals and comparison statements. d. Maintaining copies of proposals, receipts, and comparison statements for at least 5 years. e. Requiring with or as a part of each application for life insurance or an annuity a signed statement by both the applicant and the producer as to whether the applicant has existing policies or contracts. f. Informing the policy owner that the new contract may be returned within 30 days for a full refund of all premiums or other considerations made. 7. The Replaced Insurer: a. Must keep all records pertaining to the policy replacement for at least 5 years. b. Must notify the policy owner of his/her right to any information regarding the existing policy and its values. Any information requested must be provided within 5 business days after receipt of the request

Occupation, Industry, or Trade Association Groups

A group policy may be issued to an association of individuals belonging to a single occupation, industry, or trade association. The association shall be deemed the policyholder and the policy must be issued to insure association members for the benefit of persons other than the association or any of its officials. The following requirements apply: 1. The association must have been formed for purposes other than obtaining insurance. 2. All persons eligible for coverage under the policy shall be members of the association. 3. The policy premium shall be paid either from the association's own funds or the insured members' payments made specifically for the insurance, or from both. At least 75% of the association's members must participate and only those not providing satisfactory evidence of insurability may be excluded. 4. Charges collected from the insured members specifically for the insurance, and the associations' dues (if they include the cost of insurance), may be determined according to each attained age or in not less than four reasonably spaced attained age groups. 5. The policy must cover at least 25 persons at date of issue. 6. The amounts of insurance under the policy must be based upon a plan precluding individual selection either by the members or by the association.