CHAPTER 1114. REPLACEMENT OF CERTAIN LIFE INSURANCE POLICIES AND ANNUITIES
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.