CHAPTER 1114. REPLACEMENT OF CERTAIN LIFE INSURANCE POLICIES AND ANNUITIES - Texas Statutes

INSURANCE CODE

TITLE 7. LIFE INSURANCE AND ANNUITIES

SUBTITLE A. LIFE INSURANCE IN GENERAL

CHAPTER 1114. REPLACEMENT OF CERTAIN LIFE INSURANCE POLICIES AND

ANNUITIES

SUBCHAPTER A. GENERAL PROVISIONS

Sec. 1114.001. PURPOSE. The purpose of this chapter is to:

(1) regulate the activities of insurers and agents with respect

to the replacement of existing life insurance and annuities;

(2) protect the interests of purchasers of life insurance or

annuities by establishing minimum standards of conduct to be

observed in replacement or financed purchase transactions;

(3) ensure that purchasers receive information with which a

decision in the purchaser's best interest may be made;

(4) reduce the opportunity for misrepresentation and incomplete

disclosure; and

(5) establish penalties for failure to comply with the

requirements adopted under this chapter.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.002. GENERAL DEFINITIONS. In this chapter:

(1) "Agent" means an individual who holds a license under

Chapter 4054 and who sells, solicits, or negotiates life

insurance or annuities in this state.

(2) "Direct-response solicitation" means a solicitation made:

(A) by a sponsoring or endorsing entity or individually; and

(B) solely through mails, telephone, the Internet, or other mass

communication media.

(3) "Existing insurer" means the insurer, the policy or contract

of which is or will be changed or affected by a replacement.

(4) "Existing policy or contract" means an individual life

insurance policy or annuity contract that is in force, including

a policy under a binding or conditional receipt or a policy or

contract that is within an unconditional refund period.

(5) "Financed purchase" means the purchase of a new policy that

involves the actual or intended use of funds to pay all or part

of any premium due on the new policy obtained by:

(A) the withdrawal or surrender of an existing policy; or

(B) borrowing from values of an existing policy.

(6) "Illustration" means a presentation or depiction that

includes nonguaranteed elements of a life insurance policy over a

period of years.

(7) "Registered contract" means a variable annuity contract or

variable life insurance policy subject to the prospectus delivery

requirements of the Securities Act of 1933 (15 U.S.C. Section 77a

et seq.).

(8) "Replacement" means a transaction under which a new policy

or contract is to be purchased, and for which it is known or

should be known to the proposing agent or proposing insurer that,

by reason of the transaction, an existing policy or contract has

been or is to be:

(A) lapsed, forfeited, surrendered or partially surrendered,

assigned to a replacing insurer, or otherwise terminated;

(B) converted to reduced paid-up insurance, continued as

extended term insurance, or otherwise reduced in value by the use

of nonforfeiture benefits or other policy values;

(C) amended so as to effect a reduction in benefits or in the

term for which coverage would otherwise remain in force or for

which benefits would be paid;

(D) reissued with any reduction in cash value; or

(E) used in a financed purchase.

(9) "Replacing insurer" means the insurer that issues or

proposes to issue a new policy or contract that:

(A) replaces an existing policy or contract; or

(B) is a financed purchase.

(10) "Sales material" means a sales illustration and any other

written, printed, or electronically presented information:

(A) created or completed or provided by the insurer or agent;

and

(B) used in the presentation to the policy or contract owner

relating to the policy or contract purchased.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.003. DEFINITION OF POLICY SUMMARY. (a) For purposes

of this chapter, "policy summary" has the meaning assigned by

this section.

(b) For a policy or contract other than a universal life

insurance policy, "policy summary" means a written statement

regarding the policy or contract that at minimum contains, to the

extent applicable, the following information:

(1) the current death benefit;

(2) the annual contract premium;

(3) the current cash surrender value;

(4) the current dividend;

(5) the application of the current dividend; and

(6) the amount of any outstanding loan.

(c) For a universal life insurance policy, "policy summary"

means a written statement that contains, at minimum, the

following information:

(1) the beginning and ending date of the current reporting

period;

(2) the policy value at the end of the previous reporting period

and at the end of the current reporting period;

(3) the total amounts that have been credited or debited to the

policy value during the current reporting period, identifying

each by type, including interest, mortality, expense, and riders;

(4) the current death benefit at the end of the current

reporting period on each life covered by the policy;

(5) the net cash surrender value of the policy as of the end of

the current reporting period; and

(6) the amount of any outstanding loans as of the end of the

current reporting period.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.004. APPLICABILITY; EXEMPTIONS. (a) Except as

otherwise specifically provided by this chapter, this chapter

does not apply to transactions involving:

(1) credit life insurance;

(2) group life insurance or group annuities for which there is

no direct solicitation of individuals by an agent;

(3) group life insurance and annuities used to fund prepaid

funeral benefits contracts, as defined by Chapter 154, Finance

Code;

(4) an application to:

(A) exercise a contractual change or a conversion privilege made

to the insurer that issued the existing policy or contract;

(B) replace an existing policy or contract by the insurer that

issued the existing policy or contract under a program filed with

and approved by the commissioner; or

(C) exercise a term conversion privilege among corporate

affiliates;

(5) life insurance proposed to replace life insurance under a

binding or conditional receipt issued by the same insurer;

(6) a policy or contract used to fund:

(A) an employee pension benefit plan or employee welfare benefit

plan that is covered by the Employee Retirement Income Security

Act of 1974 (29 U.S.C. Section 1001 et seq.);

(B) a plan described by Section 401(a), 401(k), or 403(b),

Internal Revenue Code of 1986, if established or maintained by an

employer;

(C) a government or church plan, as defined by Section 414,

Internal Revenue Code of 1986, a government or church welfare

benefit plan, or a deferred compensation plan of a state or local

government or tax exempt organization described under Section

457, Internal Revenue Code of 1986; or

(D) a nonqualified deferred compensation arrangement established

or maintained by an employer or plan sponsor;

(7) new coverage provided under a life insurance policy or

contract if the cost is borne wholly by the insured's employer or

by an association of which the insured is a member;

(8) an existing life insurance policy that is a nonconvertible

term life insurance policy scheduled to expire in five years or

less and that cannot be renewed;

(9) immediate annuities purchased with proceeds from an existing

contract; or

(10) structured settlements.

(b) Notwithstanding Subsection (a)(6), this chapter applies to

policies or contracts used to fund any plan or arrangement that

is funded solely by contributions an employee elects to make,

whether on a pre-tax or after-tax basis, if:

(1) the insurer has been notified that plan participants may

choose from among two or more insurers; and

(2) there is a direct solicitation of an individual employee by

an insurance agent for the purchase of a contract or policy.

(c) Group life insurance or group annuity certificates marketed

through direct response solicitation are subject to Section

1114.055.

(d) Notwithstanding Subsection (a)(9), immediate annuities

purchased with proceeds from an existing policy are not exempted

from the requirements of this chapter.

(e) For the purpose of Subsections (a), (b), and (c), "direct

solicitation" does not include a group meeting held by an

insurance agent solely for the purpose of:

(1) educating or enrolling individuals; or

(2) if initiated by an individual member of the group, assisting

with the selection of investment options offered by a single

insurer in connection with enrolling that individual.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.005. FINANCED PURCHASE. (a) If a withdrawal,

surrender, or borrowing involving the policy values of an

existing policy is used to pay premiums on a new policy that is

owned by the same policyholder and is issued by the same insurer

not earlier than four months before the effective date of the new

policy or 13 months after the effective date of the new policy,

it is deemed prima facie evidence of the policyholder's intent to

finance the purchase of the new policy with existing policy

values.

(b) Subsection (a) applies only to regulatory review of an

individual transaction.

(c) The prima facie standard under Subsection (a) is not

intended to increase or decrease the monitoring obligations

contained in Section 1114.052(g).

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.006. CONSUMER NOTICE DOCUMENTS. (a) The commissioner

by rule shall adopt or approve model documents to be used for

consumer notices under this chapter.

(b) The department may develop model documents under this

section, or the commissioner may approve model documents

developed by insurers or published by national organizations

recognized by the commissioner.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.007. RULES. The commissioner may adopt reasonable

rules in the manner prescribed by Subchapter A, Chapter 36, to

accomplish and enforce the purpose of this chapter.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

SUBCHAPTER B. DUTIES OF INSURERS AND AGENTS

Sec. 1114.051. DUTIES OF AGENT; NOTICE. (a) An agent who

initiates an application for a life insurance policy or annuity

contract shall submit to the insurer, with or as part of the

application, a statement signed by both the applicant and the

agent as to whether the applicant has existing policies or

contracts.

(b) If the applicant states that the applicant does not have

existing policies or contracts, the agent's duties, after

compliance with Subsection (a), with respect to replacement are

complete.

(c) If the applicant states that the applicant does have

existing policies or contracts, the agent shall present and read

to the applicant, not later than at the time of taking the

application, a notice regarding replacements as provided by

Subsection (d).

(d) Except as provided by Subsection (e), the notice required by

this section must be given in a form adopted or approved by the

commissioner. The notice shall be signed by both the applicant

and the agent attesting that the notice has been read aloud by

the agent or that the applicant did not wish the notice to be

read aloud, in which case the agent is not required to read the

notice aloud. The notice must be left with the applicant unless

it is presented to the applicant by electronic means and signed

electronically, in which case the insurer shall mail the

applicant a copy of the notice not later than the third business

day after the date the application is received by the insurer.

The notice must list all life insurance policies or annuities

proposed to be replaced, properly identified by the name of the

insurer, the name of the insured or annuitant, and the policy or

contract number if available, and include a statement as to

whether each policy or contract will be replaced or whether a

policy will be used as a source of financing for the new policy

or contract. If a policy or contract number has not been issued

by the existing insurer, alternative identification, such as an

application or receipt number, must be listed.

(e) Commissioner approval of a notice is not required if a

notice adopted or approved by the commissioner is used and

amendments to that notice are limited to the omission of

references not applicable to the product being sold or replaced.

(f) In connection with a replacement transaction, the agent

shall leave with the applicant, at the time an application for a

new policy or contract is completed, the original of all sales

material or a copy of that material. Electronically presented

sales material must be provided to the policy or contract owner

in printed form not later than the date that the policy or

contract is delivered.

(g) Except as provided by Section 1114.053(g), in connection

with a replacement transaction, the agent shall submit to the

insurer to which an application for a policy or contract is

presented:

(1) a copy of each document required by this section;

(2) a statement identifying any preprinted or electronically

presented insurer-approved sales materials used; and

(3) copies of any individualized sales materials, including any

illustrations related to the specific policy or contract

purchased.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.052. DUTIES OF INSURERS THAT USE AGENTS. (a) An

insurer that uses an agent shall comply with this section.

(b) Each insurer shall maintain a system of supervision and

control to ensure compliance with the requirements of this

chapter. Under the system, the insurer must, at minimum:

(1) inform its agents of the requirements of this chapter and

incorporate the requirements of this chapter into all relevant

agent training manuals prepared by the insurer;

(2) provide each agent a written statement of the insurer's

position with respect to the acceptability of replacements and

provide guidance to the agent as to the appropriateness of these

transactions;

(3) review the appropriateness of each replacement transaction

that the agent does not indicate is in accord with Subdivision

(2);

(4) implement procedures to confirm that the requirements of

this chapter have been met; and

(5) implement procedures to detect transactions that are

replacements of existing policies or contracts by the existing

insurer but that have not been reported as such by the applicant

or agent.

(c) Compliance with Subsection (b)(5) may include systematic

customer surveys, interviews, confirmation letters, or programs

of internal monitoring.

(d) Each insurer must have the capacity to monitor each agent's

life insurance policy and annuity contract replacements for that

insurer. The insurer shall maintain records regarding the

monitoring and shall produce and make the records available to

the department on request. The capacity to monitor under this

subsection must include the ability to produce records for:

(1) each agent's life insurance replacements, including financed

purchases, as a percentage of the agent's total annual sales for

life insurance;

(2) the number of lapses of policies by the agent as a

percentage of the agent's total annual sales for life insurance;

(3) each agent's annuity contract replacements as a percentage

of the agent's total annual annuity contract sales;

(4) the number of transactions that are unreported replacements

of existing policies or contracts by the existing insurer

detected by the insurer's monitoring system as required by

Subsection (b)(5); and

(5) replacements, indexed by replacing agent and existing

insurer.

(e) Each insurer shall require, with or as a part of each

application for life insurance or an annuity, a signed statement

by both the applicant and the agent as to whether the applicant

has existing policies or contracts.

(f) Each insurer shall require, with each application for life

insurance or an annuity that indicates an existing policy or

contract, a completed notice regarding replacements.

(g) If the applicant has existing policies or contracts, each

insurer must be able to produce, for at least five years after

the date of termination or expiration of the proposed policy or

contract, copies of any sales material required by Section

1114.051(g), the basic illustration and any supplemental

illustrations related to the specific policy or contract that is

purchased, and the agent's and applicant's signed statements with

respect to financing and replacement.

(h) The insurer shall ascertain that the sales material and

illustrations required by Section 1114.051(g) meet the

requirements of this chapter and are complete and accurate for

the proposed policy or contract.

(i) If an application does not meet the requirements of this

chapter, the insurer shall notify the agent and applicant and

fulfill the outstanding requirements.

(j) The insurer shall maintain records required by this section

in paper, photographic, microprocess, magnetic, mechanical, or

electronic media or by any process that accurately reproduces the

actual document.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.053. DUTIES OF REPLACING INSURERS THAT USE AGENTS.

(a) If a transaction under this chapter involves a replacement,

the replacing insurer shall comply with this section.

(b) The replacing insurer shall verify that the required forms

are received and are in compliance with this chapter.

(c) The replacing insurer shall:

(1) notify any existing insurer that may be affected by the

proposed replacement not later than the fifth business day after:

(A) the date of receipt of a completed application indicating

replacement; or

(B) the date that replacement is identified if it is not

indicated on the application; and

(2) mail a copy of the available illustration or policy summary

for the proposed policy or available disclosure document for the

proposed contract to the existing insurer not later than the

fifth business day after the date of a request from the existing

insurer.

(d) The replacing insurer must be able to produce copies of the

notification regarding replacement required by Section

1114.051(d), indexed by agent, until the later of:

(1) the fifth anniversary of the date of the notification; or

(2) the date of the replacing insurer's next regular examination

by the insurance regulatory authority of the insurer's state of

domicile.

(e) The replacing insurer shall provide to the policy or

contract owner notice of the owner's right to return the policy

or contract within 30 days of the delivery of the policy or

contract and to receive an unconditional full refund of all

premiums or considerations paid on the policy or contract,

including any policy fees or charges or, in the case of a

variable or market value adjustment policy or contract, a payment

of the cash surrender value provided under the policy or contract

plus the fees and other charges deducted from the gross premiums

or considerations or imposed under the policy or contract. The

notice may be combined with other notices required under this

chapter in accordance with rules of the commissioner.

(f) In transactions in which the replacing insurer and the

existing insurer are the same or are subsidiaries or affiliates

under common ownership or control, the replacing insurer shall

allow credit for the period that has elapsed under the replaced

policy's or contract's incontestability and suicide period up to

the face amount of the existing policy or contract. With regard

to financed purchases, the credit may be limited to the amount

that the face amount of the existing policy is reduced by the use

of existing policy values to fund the new policy or contract.

(g) If an insurer prohibits the use of sales material other than

that approved by the insurer, as an alternative to the

requirements under Section 1114.051(g), the insurer shall:

(1) require with each application a statement signed by the

agent that:

(A) represents that the agent used only insurer-approved sales

material; and

(B) states that copies of all sales material were left with the

applicant in accordance with Section 1114.051(f);

(2) not later than the 10th day after the date of issuance of

the policy or contract:

(A) notify the applicant by sending a letter, or by verbal

communication with the applicant by a person whose duties are

separate from the marketing area of the insurer, that the agent

has represented that copies of all sales material have been left

with the applicant in accordance with Section 1114.051(f);

(B) provide the applicant with a toll-free telephone number to

contact the insurer's personnel involved in the compliance

function if copies of all sales material have not been left with

the applicant in accordance with Section 1114.051(f); and

(C) stress the importance of retaining copies of the sales

material for future reference; and

(3) be able to produce a copy of the letter or other

verification in the policy file until the fifth anniversary of

the date of termination or expiration of the policy or contract.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.054. DUTIES OF EXISTING INSURER. (a) If a

transaction involves a replacement, the existing insurer shall

comply with this section.

(b) The existing insurer shall retain and be able to produce all

replacement notifications received, indexed by the replacing

insurer, until the later of:

(1) the fifth anniversary of the date of receipt of the

notification; or

(2) the date of conclusion of the next regular examination

conducted by the insurance regulatory authority of the existing

insurer's state of domicile.

(c) The existing insurer shall send a letter to the policy or

contract owner regarding the owner's right to receive information

regarding the existing policy or contract values. The letter

must include, if available, an in force illustration or, if an in

force illustration cannot be produced not later than the fifth

business day after the date of receipt of a notice that an

existing policy or contract is being replaced, a policy summary.

The information must be provided not later than the fifth

business day after the date of receipt of the request from the

policy or contract owner.

(d) On receipt of a request to borrow, surrender, or withdraw

any policy values, the existing insurer shall send a notice

advising the policy owner that the release of policy values may

affect the guaranteed elements, nonguaranteed elements, face

amount, or surrender value of the policy from which the values

are released. The notice must be sent separately from the

payment if the payment is sent to any person other than the

policy owner. In the case of consecutive automatic premium loans,

the insurer is only required to send the notice at the time of

the first loan.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.055. DUTIES OF INSURERS REGARDING DIRECT RESPONSE

SOLICITATIONS. (a) In the case of an application initiated as a

result of a direct response solicitation, the insurer shall

require submission of a statement asking whether the applicant,

by applying for the proposed policy or contract, intends to

replace, discontinue, or change an existing policy or contract.

The statement may be included with, or submitted as part of,

each completed application for a policy or contract. If the

applicant indicates a replacement or change is not intended or if

the applicant fails to respond to the statement, the insurer

shall send the applicant, with the policy or contract, a notice,

in a form adopted or approved by the commissioner, regarding

replacement.

(b) If the insurer has proposed the replacement or if the

applicant indicates a replacement is intended and the insurer

continues with the replacement, the insurer shall:

(1) provide to the applicant or prospective applicant, with the

policy or contract, a notice adopted or approved by the

commissioner; and

(2) comply with the requirements of:

(A) Section 1114.053(c), if the applicant furnishes the names of

the existing insurers; and

(B) Sections 1114.053(d), (e), and (f).

(c) In a situation described by Subsection (b)(1), the insurer

may use a notice that deletes references to the agent, including

the agent's signature, and references not applicable to the

product being sold or replaced, without having to obtain prior

approval of the notice from the commissioner. The insurer's

obligation to obtain the applicant's signature is satisfied if

the insurer can demonstrate that the insurer has made a diligent

effort to secure a signed copy of the notice. The requirement to

make a diligent effort is deemed satisfied if the insurer

includes in the mailing a self-addressed postage prepaid envelope

with instructions for the return of the signed notice.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.056. REGISTERED CONTRACTS. A registered contract is

exempt from the requirements of Sections 1114.053(c) and

1114.054(c) with respect to the provision of illustrations or

policy summaries, but must provide instead premium or contract

contribution amounts and identification of the appropriate

prospectus or offering circular.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

SUBCHAPTER C. ENFORCEMENT

Sec. 1114.101. UNFAIR METHOD OF COMPETITION; SANCTIONS AND

PENALTIES. (a) A failure by an insurer or agent to comply with

this chapter constitutes a violation of Chapter 541 and is

subject to sanctions and penalties as provided by that chapter.

For purposes of this section, examples of violations include:

(1) deceptive or misleading information set forth in any sales

material;

(2) failing to ask the applicant in completing the application

the pertinent questions regarding the possibility of financing or

replacement;

(3) intentionally recording an answer incorrectly;

(4) advising an applicant to respond negatively to any question

regarding replacement in order to prevent notice to the existing

insurer; or

(5) advising a policy or contract owner to contact the insurer

directly in such a way as to attempt to obscure the identity of

the replacing agent or insurer.

(b) A policy or contract owner has the right to replace an

existing life insurance policy or annuity contract after

indicating in or as a part of applications for new coverage that

replacement is not the intention. However, patterns of that

action by policy or contract owners of the same agent shall be

deemed prima facie evidence of the agent's knowledge that

replacement was intended in connection with the identified

transactions, and those patterns of action shall be deemed prima

facie evidence of the agent's intent to violate this chapter.

(c) If it is determined that the requirements of this chapter

have not been met, the replacing insurer shall provide to the

policy owner:

(1) an in force illustration or, if an in force illustration is

not available, a policy summary for the replacement policy or an

available disclosure document for the replacement contract; and

(2) the appropriate notice regarding replacements.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.

Sec. 1114.102. ADDITIONAL SANCTIONS. (a) In addition to

sanctions and penalties under Chapter 541 as provided by Section

1114.101, an insurer or agent that violates this chapter is

subject to sanctions as provided by Chapter 82, which may

include:

(1) the revocation or suspension of the agent's license or the

insurer's certificate of authority;

(2) administrative penalties under Chapter 84; and

(3) forfeiture of any commissions or other compensation paid to

an agent as a result of the transaction in connection with which

the violations occurred.

(b) In addition, if the commissioner has determined that the

violations of this chapter were material to the sale, the insurer

may be required to:

(1) make restitution in the manner provided by Section 82.053;

(2) restore policy or contract values; and

(3) pay interest at the rate set by Section 84.050 on the amount

refunded in cash.

Added by Acts 2007, 80th Leg., R.S., Ch.

904, Sec. 1, eff. September 1, 2007.