806 KAR 12:160. Standards for accelerated death benefits

Link to law: http://www.lrc.ky.gov/kar/806/012/160.htm
Published: 2015

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      806 KAR 12:160. Standards for

accelerated death benefits.

 

      RELATES TO: KRS 304.6-170, 304.6-171,

304.12-010, 304.12-020, 304.12-235, 304.14-600(2), 304.15-115

      STATUTORY AUTHORITY: KRS 304.2-110

      NECESSITY, FUNCTION, AND CONFORMITY: KRS

304.2-110(1) authorizes the Executive Director of the Office of Insurance to

promulgate administrative regulations necessary for or as an aid to the

effectuation of any provision of the Kentucky Insurance Code, KRS Chapter 304. This

administrative regulation establishes standards for accelerated death benefits

in individual life insurance forms.

 

      Section 1. Definitions. (1) "Accelerated

death benefit" means the advance payment of some or all of the death

proceeds payable pursuant to a life insurance policy:

      (a) To the owner, during the lifetime of

the insured triggered by a qualifying event;

      (b) That reduces the death benefit

otherwise payable under the policy through a present value payment or

imposition of a lien upon the death benefits; and

      (c) That are payable upon the occurrence

of any single qualifying event.

      (2) "Executive director" is

defined in KRS 304.1-050(1).

      (3) "Form" means accelerated

death benefit form, or policy provision if the benefit is built into the

policy.

      (4) "Qualifying event" means a

medical condition that is reasonably expected to result in a drastically

limited life span for the insured.

 

      Section 2. Applicability. The

requirements established in this administrative regulation shall:

      (1) Apply to accelerated death benefits

in individual life insurance policies; and

      (2) Not apply to long-term care insurance

or policies providing long-term care benefits.

 

      Section 3. Form Filings. The following form

filing requirements shall apply to accelerated death benefits and shall be

included on Certification Form L-TD Life, Transmittal Document, Office of Insurance

(1/1/06), incorporated by reference in 806 KAR 14:005, or as an attachment to

the filing:

      (1) A statement of the types of policy

forms with which this benefit will be offered;

      (2) Underwriting restrictions involving

face amount or age;

      (3) Whether the benefit is intended for

use with new issues, or in force business, or both;

      (4) A notice describing the amount of the

accelerated benefit option and its effect on the other benefit provisions of

the policy, to be provided to the owner prior to or concurrent with the

election of the accelerated death benefit option; and

      (5) An actuarial memorandum prepared,

dated, and signed by the member of the American Academy of Actuaries which

shall provide the following information:

      (a) A description of the accelerated

death benefit, including the effects of payment of the accelerated death

benefit on all policy benefits, premium payments, cost of insurance rates, and

values, including any outstanding loan, if applicable, for all types of forms

with which the accelerated death benefit will be used;

      (b) Justification for expense charges

associated with the accelerated death benefit and the maximum expense charges;

      (c) The interest rate or interest rate

methodology used in any present value calculation or in accruing interest on

the amount of the accelerated death benefit, which shall not exceed the greater

of:

      1. The current yield on 90-day treasury

bills; or

      2. An adjustable rate determined in

accordance with KRS 304.15-115;

      (d) The mortality basis and methodology,

including the period of time applicable to any mortality discount, used in any

present value calculation of the accelerated death benefit;

      (e) The mortality and morbidity basis and

methodology used in the determination of any separate premium or costs of

insurance for the accelerated death benefit;

      (f) The formula used to determine the

accelerated death benefit, including any limitations on the amount of the

benefit, and the formula used to determine the post-acceleration premium;

      (g) A sample calculation of the

accelerated death benefit.

      1. If the policy contains a loan

provision, the example shall assume that there is an outstanding loan at date

of acceleration.

      2. All policy benefits, premium payments,

cost of insurance charges, and values, including the outstanding loan, if applicable,

immediately before and immediately after acceleration shall be shown in the example;

      (h) If an accelerated death benefit may

be paid in installments, the basis used in the calculation of the minimum periodic

payment for the payment period and a sample calculation of a minimum periodic

payment;

      (i) If the insured dies before all

periodic payments for the payment period are made, identification of the basis

used and a sample calculation of the lump sum payable; and

      (j) A certification that the value and

premium of the accelerated death benefit is incidental to the life coverage.

 

      Section 4. General Form Requirements. (1)

The company's definition of a "drastically limited life span" shall

have a minimum of "six (6) months or less" and a maximum of

"twenty-four (24) months or less" and shall be specified in the form

      (2) The cover page of the form, or the

cover page of the policy if the benefit is built into the policy, shall include

the following in prominent type:

      (a) The term "accelerated death

benefit" included in the brief description or descriptive title of the

form;

      (b) A clear statement that the death

benefit and any accumulation values and cash values and, if applicable, premium

payments or cost of insurance charges, shall be reduced if an accelerated death

benefit is paid; and

      (c) A clear statement recommending that

the owner seek additional information from the owner's personal tax advisor

about the tax status of the accelerated death benefit payment.

      (3) The form shall not contain provisions

that unfairly discriminate among insureds with differing qualifying events

covered pursuant to the form or among insureds with similar qualifying events

covered pursuant to the form.

      (4) Products subject to these standards

shall not be described as long-term care insurance or as providing long-term

care benefits.

      (5)(a) The percentage or dollar amount of

the policy death benefit that may be accelerated may be limited.

      (b) The limit shall be specified in the

form.

      (6) A time frame within which proof of

eligibility shall be provided shall be prohibited.

 

      Section 5. Benefit Design Options. (1) The

form shall describe the accelerated death benefit option or options that shall

be available to the owner, such as the payment of all of the death benefit of

the policy, the payment of part of the death benefit of the policy, or a lien

on the death benefit of the policy.

      (2) If the form allows for the present

value calculation, the form shall:

      (a) Specify the amount of the death

benefit of the policy that may be accelerated by the owner;

      (b) State that the company may apply a

portion of the accelerated death benefit to repay an outstanding policy loan

but only up to the amount of the outstanding policy loan multiplied by the

percentage of the policy death benefit that has been accelerated;

      (c) State that the premium shall be

reduced to the premium that would apply had the policy been issued at the

reduced amount, and may be further reduced according to some defined formula,

such as pro rata reduction, or become paid-up;

      (d) State that the company may pay the

owner a present value of the policy death benefit being accelerated. The

interest rate or interest rate methodology used in the calculation shall be disclosed

in the form; and

      (e) State that the policy cash value, if

any, shall be reduced by the same percentage as the policy death benefit.

      (3) If the payment to the owner of the

accelerated death benefit is treated as a lien on the death benefits of the

policy, the form shall state that:

      (a) The lien may be applied only against

the policy death benefit, not against any policy cash value;

      (b) The lien may bear interest.

      1. The interest rate accrued on the portion

of the lien which is equal to the cash value of the policy upon acceleration

shall not be more than the policy loan interest rate stated in the policy. For

the amount of the lien in excess of the cash value, the interest rate or

interest rate methodology shall be disclosed in the form;

      (c) Expense charges may be added to the

lien;

      (d) Due and unpaid premiums may be

included in the lien after the automatic premium loan, if available, is

exercised; and

      (e) Access to the policy cash value may

be restricted to the excess of the cash value over the sum of the lien and any

other outstanding policy loans.

      (4)(a) A premium charge or cost of

insurance charge for the accelerated death benefit shall be disclosed to the

insured.

      (b) A premium charge or cost of insurance

charge shall be prohibited for a qualifying event of the type described in Section

11(1)(a) of this administrative regulation.

      (5) The company may deduct a reasonable

expense charge for accelerating the death benefit and shall state the maximum expense

charge in the form.

      (6) If an index used in determining the

accelerated death benefit is discontinued, the company shall use an appropriate

substitute index.

      (7) The form or policy shall not:

      (a) Provide that the insured forfeits the

remainder of the policy death benefit upon acceleration of part of the policy

death benefit;

      (b) Place an aggregate limit provision

that caps the accelerated death benefits payable for all policies issued by the

company and its subsidiaries and affiliates;

      (c) Require that the accelerated death

benefit be provided if the policy remains in force for a specific period of

time following acceleration. The option may exclude from acceleration a term

insurance coverage scheduled to terminate prior to the end of the period used

to define a qualifying event of the type described in Section 11(1)(a) of this

administrative regulation; and

      (d) Contain restrictions on the use of

the accelerated death benefit proceeds.

      (8) A form with an accelerated death

benefit shall include an option upon acceleration:

      (a) To reduce the accelerated death

benefit payment by an amount actuarially determined to pay the remaining

premiums; or

      (b) To continue to pay premiums to keep

the policy in force.

 

      Section 6. Effect of Benefit Payment on other

Benefit Provisions. (1) Prior to or concurrent with the election to accelerate

the policy death benefits, the owner and each irrevocable beneficiary shall be

given a statement demonstrating the effect of the acceleration of the payment

of death benefits on the cash value, death benefit, premium, cost of insurance

charges, and policy loans, including policy liens, of the particular policy involved.

      (a) The statement shall display the premium

or cost of insurance charges necessary to continue coverage following the acceleration,

and shall display all expense and interest charges associated with accelerating

the death benefit.

      (b) Statements for use with liens shall

state that future due and unpaid premiums or cost of insurance charges may be included

in the lien if the provision provides for the charges.

      (c) The statement shall be based only on

guaranteed values and shall not show any projected or non-guaranteed values.

      (d) The statement shall include a

disclosure that receipt of an accelerated death benefit may affect eligibility

for Medicaid or other government benefits or entitlements and may have income

tax consequences.

      (2) The form shall describe the effect of

acceleration on premiums, cost of insurance charges, cash values, and loan

values, as applicable.

      (3) The form shall describe the effect

that acceleration of death benefits will have on coverage on another insured pursuant

to the policy.

      (4) If a part of the death benefit

remains after payment of the accelerated death benefit, the following

requirements shall apply:

      (a) If the accelerated death benefit is

paid under a present value calculation, the policy shall be modified by an

endorsement, which includes a statement of cash values, policy loans, premiums,

cost of insurance charges, and death benefits following acceleration;

      (b) The dividends or non-guaranteed

elements credited shall not discriminate between policies whose death benefits

have been reduced through acceleration and policies originally issued in the

amount of the reduced death benefits; and

      (c) The accidental death benefit

provision, if any, in the policy shall not be affected by the payment of the

accelerated death benefit.

 

      Section 7. Exclusions or Restrictions. The

accelerated death benefit shall not contain exclusions or restrictions that are

not also exclusions or restrictions in the policy.

 

      Section 8. Incontestability. The accelerated

death benefit shall be incontestable on the same, or on a more favorable basis,

as the individual policy.

 

      Section 9. Payment Options. (1)(a) The

payment options shall include the option to receive the accelerated death

benefit payment in a lump sum and may include an option to receive the benefit

in periodic payments for a period certain.

      (b) Periodic payments based on the

continued survival or institutional confinement of the insured shall be prohibited.

      (2)(a) The amount payable as a lump sum

shall be at least equal to the acceleration percentage multiplied by the difference

between the current policy cash value and any outstanding policy loans.

      (b) The current policy cash value shall

include any termination dividend payable on the surrender of the policy.

      (3)(a) The form shall specify what occurs

if the insured dies before all payments of the accelerated death benefit are

made.

      (b) If the present value of remaining

payments is paid, the interest rate used to calculate any present value of the

settlement option shall be that assumed in calculating the original payments.

      (4) If the insured dies after the owner

elects to receive accelerated death benefits but before benefits are received,

the election shall be cancelled and the death benefit paid pursuant to the

policy.

 

      Section 10. Payment Procedures. The

procedures required to accelerate the death benefit of the policy shall be specified

in the form and shall be at least as favorable as the following:

      (1)(a) If the company requires the filing

of a proof of eligibility claim form, the company shall provide the claim form

within fifteen (15) days of the acceleration request.

      (b) If the claim form is not furnished

within fifteen (15) days, it shall be considered that the claimant complied

with the claim requirements if the claimant submits written proof covering the

occurrence, the character, and the extent of the occurrence for which claim is

made;

      (2)(a) The company may reserve the right

to require a second or third medical opinion to confirm benefit eligibility.

      (b) The second or third medical opinion shall

be provided at the company’s expense.

      (c) The second medical opinion may

include a physical examination by a physician designated by the company.

      (d) In the case of conflicting opinions,

eligibility for benefits shall be determined by a third medical opinion provided

by a physician that is mutually acceptable to the insured and the company;

      (3) The accelerated death benefit shall

be paid to the owner or owner’s estate while the insured is living, unless the

benefit has been otherwise assigned or designated by the owner; and

      (4)(a) Prior to the payment of the

accelerated death benefit, the company shall obtain from any assignee or

irrevocable beneficiary a signed acknowledgement of concurrence for payout.

      (b) If the company paying the accelerated

death benefit is itself the assignee under the policy, an acknowledgement shall

not be required.

      (c) Payment of the accelerated death

benefit is due in accordance with KRS 304.12-235 with respect to any delay in

processing requests to accelerate the payment of death benefits.

 

      Section 11. Qualifying Events. (1) A

qualifying event may, at the option of the company, include one (1) or more of

the following:

      (a) A medical condition that requires

extraordinary medical intervention, such as major organ transplant or

continuous artificial life support, without which the insured is expected to die;

      (b) A condition that usually requires

continuous confinement in an institution, as defined in the form, and the

insured is expected to remain there for the rest of the insured's life;

      (c) A specified medical condition that,

in the absence of extensive or extraordinary medical treatment, is expected to result

in a drastically limited life span; or

      (d) A chronic illness that results in permanent

inability to perform a specified number of activities of daily living without

substantial assistance from another individual, or permanent severe cognitive impairment,

or both.

      (2) The form shall specify the terms and

conditions applicable to each qualifying event.

      (3) The form shall not require that the

cause of a qualifying event first manifest itself or be diagnosed after

issuance of the individual policy or form.

      (4) The form shall not include a waiting

period requirement.

      (5) A requirement that the individual

policy or form be in force past the incontestable period shall be prohibited.

 

      Section 12. Reinstatement. The form shall

include a reinstatement provision on the same, or more favorable, terms as

contained in the policy.

 

      Section 13. Termination. (1) The form

shall include the following conditions for termination, upon:

      (a) A written request; or

      (b) Termination of the policy; or

      (c) Nonpayment of any separate premium or

cost of insurance charge for the accelerated death benefit, in accordance with

the provisions of the form or the policy.

      (2) The form may state that the

accelerated death benefit may be terminated if a nonforfeiture benefit becomes

effective pursuant to the policy.

      (3) The form shall state that termination

shall not prejudice the payment of benefits for a qualifying event that

occurred while the form was in force.

 

      Section 14. Effective Date. The requirements,

implementation, and enforcement of this administrative regulation shall begin

on January 1, 2008. (33 Ky.R. 4301; Am. 34 Ky.R. 295; 736; eff. 11-2-2007.)