806 KAR 12:020. Fair disclosure to consumers

Link to law: http://www.lrc.ky.gov/kar/806/012/020.htm
Published: 2015

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      806 KAR 12:020. Fair

disclosure to consumers.



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


KRS 304.2-110


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


      (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


      (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


      (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


      (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


      (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


      (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


      (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.)