806 KAR 12:020. Fair
disclosure to consumers.
RELATES TO: KRS
304.9-440, 304.12-010, 304.12-020, 304.12-040, 304.12-110, 304.12-130,
304.14-120 to 304.14-180
STATUTORY AUTHORITY:
KRS 304.2-110
NECESSITY, FUNCTION,
AND CONFORMITY: KRS 304.2-110 provides that the Executive Director of
Insurance shall make reasonable rules and regulations necessary for or as an
aid to the effectuation of any provision of the Kentucky Insurance Code. This administrative
regulation further interprets and implements statutory standards to assure fair
disclosure to consumers.
Section 1. Deeming
it to be in the highest degree of public interest that the insurance buying
public will not be deceived or misled in regard to the purchase of life
insurance, it is therefore considered proper and desirable to further implement
and interpret the statutory standards which generally relate to the sale of
life insurance.
Section 2.
Applicability. This administrative regulation shall apply:
(1) To any insurance
company, person, broker, or consultant, as those terms are defined in the
insurance code.
(2) To acts and
practices in the advertising, promotion, solicitation, negotiation of or
effecting the sale of life insurance policies (this administrative regulation
shall not apply to group insurance policies or to annuity contracts).
(3) To such acts and
practices whether they involve the use of language disseminated by means of
sales kits, policy jackets or covers, letters, personal presentation, visual
aids or other sales media.
Section 3. Statement
of Policy. (1) The purpose of this administrative regulation, essentially, is
to assure fair disclosure of relevant facts in the sale of life insurance. This
administrative regulation is also designed to protect purchasers and
prospective purchasers of life insurance policies against the use of sales
methods which are misleading because of:
(a) The omission of
facts fairly describing both the subject matter of a life insurance policy and
the benefits obtainable thereunder.
(b) An undue emphasis
upon facts which, however, true, are not relevant to the sales of life
insurance.
(c) An undue
emphasis upon features which are of incidental or secondary importance to the
life insurance aspects of a policy.
(2) To assure such
fair disclosure and to prevent the use of misleading sales methods this
administrative regulation provides advance interpretations as to specific acts
and practices which the Office of Insurance believes constitute violations of
said statutes; provided, however, it is recognized that whether particular
conduct comes within the prohibition of said statutory provisions depends upon
the facts in each case.
(3) Although this
administrative regulation is addressed to selected acts and practices which
have been of serious concern to the Office of Insurance, this delimitation is
not a determination that any act of practice not specified herein is in
conformance with the aforesaid statutory provisions. However, this
administrative regulation will be read as a guide in considering whether any
unspecified act or practice is of the kind or character which may be within the
prohibitions of said statutory provisions.
(4) In accordance
with the purposes and limitations set out in Sections 1 and 2 of this
administrative regulation, the acts and practices set out in the following
sections are declared to be unlawful when used in context or done under such
circumstances or conditions as to have the capacity and tendency to mislead a
purchaser or prospective purchaser to believe that he will receive, or that it
is probable he will receive something other than an insurance policy, some
benefit not available to other persons of the same class and equal expectation
of life. Each of said sections will, therefore, be construed and applied in
concordance with the provisions of this section.
Section 4. Policy
Forms. From the effective date of this administrative regulation no company
shall:
(1) Include coupons
as a part of policies containing pure endowment benefits. A pure endowment
benefit is a guaranteed insurance benefit, actuarially determined, the payment
of which is contingent upon the survival of the insured to a specified point in
time.
(2) Issue a policy
of insurance containing pure endowment benefits unless the gross premium for
these provisions is shown prominently and separately in the policy as distinct
from the regular insurance gross premium. This subsection shall not apply to
any policy in which the amount of any pure endowment or periodic benefit or
benefits payable during any policy year is greater than the total annual
premium for such year.
(a) This separate
gross premium for the series of pure endowments shall be based on reasonable
assumptions and be consistent with the basic policy form as to interest,
mortality and expense.
(b) The amount of
the guaranteed series of pure endowment benefits shall be expressed in dollar
amounts and shall not be presented or defined, either in the policy or any
sales and advertising material, as a "percentage" of any premiums or
benefits contained therein.
(c) All policies
with pure endowments sold in Kentucky after the 60th day following the date of
this order shall bear the following statement, or similar wording approved by
the office set forth, rubber-stamped on the face of the policy until present
stocks are exhausted: The premium includes $____ for pure endowment benefits.
(3) Use a dividend
illustration in connection with a participating life insurance policy unless
such dividend illustration is on file with the Executive Director of
Insurance as a part of a rate book or as a separate filing.
(4) Use such words
as "investment or investment plan," "insured investment
plan," "profit-sharing," "charter plan,"
"founders plan," or similar language in a life insurance policy,
either in context or under such circumstances or conditions as to have the
capacity and tendency to mislead a purchaser or prospective purchaser to
believe that he will receive or that it is probable he will receive something
other than an insurance policy, some benefit not provided in the policy, or
some benefit not available to other persons of the same class and equal
expectation of life.
Section 5. Sales
Presentation and Solicitation. From the effective date of this administrative
regulation it shall be deemed unlawful to make:
(1) Reference to a
policy using similar terminology as described in Section 4(4) of this
administrative regulation and more particularly:
(a) Statements or
representations that the prospective policyholder will receive the right to
benefits from the insurance company which are not stipulated in the policy
itself; or
(b) Statements or
references that refer to premium payments in language stating the payment is a
"deposit" unless:
1. The payment
establishes a debtor-creditor relationship between the insurance company and
the policyholder; or
2. The term is used
in conjunction with the word "premium" in such a manner as to
indicate clearly the true character of the payment.
(c) Statements which
describe a life insurance policy or premium payments in terms of "unit of
participation" unless accompanied by other language fairly indicating
their reference to a life insurance policy or to premium payments, as the case
may be. Statements which describe a life insurance policy or premium payments
in terms of units henceforth shall be followed by the dollar amount
representing the annual premium for each unit or units described; and further
wording clearly indicating that the unit or units represent a life insurance
policy.
(d) Statements which
infer that the guaranteed endowments available under a policy are interest,
earnings, return on investment, or anything other than benefits for which the
cost is taken into consideration in calculating the total premium.
(2) Reference to any
policy or contract in such a manner as to misrepresent its true nature and more
particularly:
(a) Statements which
tend to lead the prospect to believe that the agent is dealing in other than a
life insurance contract.
(b) Statements which
tend to lead the prospect to believe that life insurance is incidental to the
purchase of the contract.
(c) Statements or
reference relating to the growth of the life insurance industry or to the tax
status of life insurance companies in a context which would reasonably be
understood to interest a prospect in the purchase of shares of stock in an
insurance company rather than in the purchase of a life insurance policy.
(d) Statements which
reasonably give rise to the inference that the insured will enjoy a status
common to a stockholder or will acquire a stock ownership interest in the
insurance company by virtue of purchasing the policy.
(e) References or
statements to a company's "investment department," "insured
investment department," or similar terminology in such a manner as to
imply that the policy was sold, or issued, or is serviced by the investment
department of the insurance company.
(3) References
regarding the payment of dividends in such a manner as to misrepresent their
true nature, and more particularly:
(a) Providing any
illustration as to projected dividends unless the dividend scale is based on
the experience currently used by the company for dividends, and unless the
illustration is expressed in dollar amounts.
(b) Statements which
use the words "dividends," "cash dividends,"
"surplus," or similar phrases in such a manner as to state or imply
that the payment of dividends is guaranteed or certain to occur.
(c) Statements or
references that a purchaser of a policy will share in a stated percentage or
portion of the earnings of the company.
(d) Statements which
use the word "dividend," "cash dividends,"
"surplus," or similar terminology shall be expressed only in dollar
amounts. This shall apply to projected dividends as well as past experience on
dividends.
(e) Statements or
inferences that projected dividends under a participating policy will be or can
be sufficient at any time to assure the receipt of benefits, such as a paid-up
policy, without the further payment of premiums unless the statement is
accompanied by an adequate explanation as to:
1. What benefits or
coverage would be provided at such time.
2. The conditions
under which this would occur.
(4) Reference to any
policy or contract in such a manner as to suggest that certain policyholders
will receive preferential treatment, and more particularly:
(a) Statements or
references which would reasonably tend to imply that by purchasing a policy,
the purchaser or prospective purchaser will become a member of a limited group
of persons who may receive in the payment of dividends, special advantages,
benefits, or favored treatment. This paragraph has no relation or applicability
to policies under which insured persons of one (1) class of risk may receive
dividends of a higher rate than persons of another class of risk.
(b) Statements or
references that each policyholder is given the right to allocate a specific
number of policies.
(c) Statements or
inferences that only a limited number of person or a limited class of persons,
will be eligible to buy a particular kind of policy, unless such limitation is
related to recognized underwriting practices.
(d) Statements or
inferences that policyholders who act as "centers of influence" for
an insurance company in that capacity will share in the company's surplus
earnings in some manner not available to policyholders of the same class.
(e) Comparisons to
the past experience of other life insurance companies where the comparison is
based on an arbitrary selection as to either the companies or the statistics or
other data which are used. This paragraph is intended to protect policyholders
from being misled as to the character of a policy or its benefits, through the
presentation of experience of companies with reverse experience.
Section 6.
Dividends. (1) Policyholder premium or gross cost reductions on participating
policies will be designated dividends. No other items shall be designated as
dividends. Dividends shall not be guaranteed as to amount, percentage or
premium, or other basis. The decision for declaration of a dividend shall be
determined by the insurance company's board of directors, based solely on
operating results or projection for those policies designated
"participating" policies.
(2) When dividends
are "declared" for a policy year classification (based on specific
plan and/or age classifications as they relate to contribution of company
ability to declare dividends), dividends will be apportioned to all policies so
entitled in that policy year.
(3) The date
dividends are declared shall be the date liability is established for the
dividends and the reserve established for this liability will be the full
amount of the dividends declared.
Section 7. Other
Provisions. (1) In order to implement this administrative regulation the office
will exercise its right at its discretion to require the submission of any or
all sales material.
(2) Each company
will be held responsible for disseminating this administrative regulation to
its representatives and assuring compliance.
(3) The provisions
of this administrative regulation are intended to apply only to policies issued
on or after its effective date for delivery in this state, and it does not
apply to contracts issued prior to the effective date nor to contracts issued
prior to the effective date nor to contracts issued for delivery outside the
state. The adoption of this administrative regulation should not disturb or
cast doubt about the validity of previously issued contracts described herein.
(4) No insurance
company, insurance agent, consultant, nor insurance company representative
shall as a competitive or "twisting" device, inform any policyholder
or prospective policyholder that any insurance company was required to change a
policy form or related material to comply with the provisions of this administrative
regulation.
(5) The executive
director may suspend or revoke any license or authority for violation of the
provisions of this administrative regulation after a hearing upon written
notice as required by the insurance code. (I-12.01; 1 Ky.R. 1077; eff. 7-2-75;
TAm eff. 8-9-2007.)
