806 KAR 15:030.
Variable life insurance.
RELATES TO: KRS
304.2-100, 304.7-240, 304.12-020, 304.12-030, 304.14-120, 304.15-115,
304.15-130, 304.15-390
STATUTORY AUTHORITY:
KRS Chapter 13A, 304.2-110, 304.15-390
NECESSITY, FUNCTION,
AND CONFORMITY: KRS 304.2-110 provides that the Executive Director of
Insurance may make reasonable administrative regulations necessary for or as an
aid to the effectuation of any provision of the Kentucky Insurance Code. KRS
304.15-390 authorizes the Executive Director of Insurance to make
administrative regulations controlling the sale and issuance of variable
contracts. This administrative regulation establishes guidelines for the sale
and issuance of variable life insurance.
Section 1.
Definitions. As used in this administrative regulation:
(1)
"Affiliate" of an insurer means any person, directly or indirectly,
controlling, controlled by, or under common control with such insurer; any
person who regularly furnishes investment advice to such insurer with respect
to its separate accounts for which a specific fee or commission is charged; or
any director, officer, partner, or employee of such insurer, controlling or
controlled person, or person providing investment advice or any member of the
immediate family of such person.
(2)
"Agent" means any person, corporation, partnership, or other legal
entity which is licensed by this state as a life insurance agent.
(3) "Assumed
investment rate" means the rate of investment return which would be
required to be credited to a variable life insurance policy, after deduction of
charges for taxes, investment expenses, and mortality and expense guarantees to
maintain the variable death benefit equal at all times to the amount of death
benefit, other than incidental insurance benefits, which would be payable under
the plan of insurance if the death benefit did not vary according to the
investment experience of the separate account.
(4) "Benefit
base" means the amount to which the net investment return is applied.
(5) “Executive
Director” is defined in KRS 304.1-050(1).
(6)
"Control" (including the terms "controlling,"
"controlled by" and "under common control with") means the
possession, direct or indirect, or the power to direct or cause the direction
of the management and policies of a person, whether through the ownership of
voting securities, by contract other than a commercial contract for goods or
nonmanagement services, or otherwise, unless the power is the result of an
official position with or corporate office held by the person. Control shall be
presumed to exist if any person, directly or indirectly, owns, controls, holds
with the power to vote, or holds proxies representing more than ten (10)
percent of the voting securities of any other person. This presumption may be
rebutted by a showing made to the satisfaction of the commissioner that control
does not exist in fact. The executive director
may determine, after furnishing all persons in interest notice and opportunity
to be heard and making specific findings of fact to support such determination,
that control exists in fact, notwithstanding the absence of a presumption to
that effect.
(7) "Flexible
premium policy" means any variable life insurance policy other than a
scheduled premium policy as specified in subsection (15) of this section.
(8) "General
account" means all assets of the insurer other than assets in separate
accounts established pursuant to KRS 304.15-390 or pursuant to the
corresponding section of the insurance laws of the state of domicile of a
foreign or alien insurer, whether or not for variable life insurance.
(9) "Incidental
insurance benefit" means all insurance benefits in a variable life
insurance policy, other than the variable death benefit and the minimum death
benefit, including but not limited to accidental death and dismemberment
benefits, disability benefits, guaranteed insurability options, family income,
or term riders.
(10) "May"
is permissive.
(11) "Minimum
death benefit" means the amount of the guaranteed death benefit, other
than incidental insurance benefits, payable under a variable life insurance
policy regardless of the investment performance of the separate account.
(12) "Net
investment return" means the rate of investment return in a separate
account to be applied to the benefit base.
(13)
"Person" has the meaning specified in KRS 304.1-020, and also
includes a fund.
(14) "Policy
processing day" means the day on which charges authorized in the policy
are deducted from the policy's cash value.
(15) "Scheduled
premium policy" means any variable life insurance policy under which both
the amount and timing of premium payments are fixed by the insurer.
(16) "Separate
account" means a separate account established pursuant to KRS 304.15-390
or pursuant to the corresponding section of the insurance laws of the state of
domicile of a foreign or alien insurer.
(17)
"Shall" is mandatory.
(18) "Variable
death benefit" means the amount of the death benefit, other than
incidental insurance benefits, payable under a variable life insurance policy
dependent on the investment performance of the separate account, which the
insurer would have to pay in the absence of any minimum death benefit.
(19) "Variable
life insurance policy" means any individual policy which provides for life
insurance the amount or duration of which varies according to the investment
experience of any separate account or accounts established and maintained by
the insurer as to such policy, pursuant to KRS 304.15-390 or pursuant to the
corresponding section of the insurance laws of the state of domicile of a
foreign or alien insurer.
Section 2.
Qualification of Insurer to Issue Variable Life Insurance. The following
requirements are applicable to all insurers either seeking authority to issue
variable life insurance in this state or having authority to issue variable
life insurance in this state.
(1) Licensing and
approval to do business in this state. An insurer shall not deliver or issue
for delivery in this state any variable life insurance policies unless:
(a) The insurer is
licensed or organized to do a life insurance business in this state;
(b) The insurer has
obtained the written approval of the executive director
for the issuance of variable life insurance policies in this state. The executive
director shall grant such written approval only after he has
found that:
1. The plan of
operation for the issuance of variable life insurance policies is not unsound;
2. The general
character, reputation, and experience of the management and those persons or
firms proposed to supply consulting, investment, administrative, or custodial
services to the insurer are such as to reasonably assure competent operation of
the variable life insurance business of the insurer in this state; and
3. The present and
foreseeable future financial condition of the insurer and its method of
operation in connection with the issuance of such policies is not likely to
render its operation hazardous to the public or its policyholders in this
state. The executive director shall consider, among
other things:
a. The history of
operation and financial condition of the insurer;
b. The
qualifications, fitness, character, responsibility, reputation and experience
of the officers and directors and other management of the insurer and those
persons or firms proposed to supply consulting, investment, administrative, or
custodial services to the insurer;
c. The applicable
law and administrative regulations under which the insurer is authorized in its
state of domicile to issue variable life insurance policies. The state of entry
of an alien insurer shall be deemed its state of domicile for this purpose; and
d. If the insurer is
a subsidiary of, or is affiliated by common management or ownership with
another company, its relationship to such other company and the degree to which
the requesting insurer, as well as the other company, meets these standards.
(2) Filing for
approval to do business in this state. The executive director
may, at his discretion, require that an insurer, before it delivers or issues
for delivery any variable life insurance policy in this state, file with the executive
director the following information for the consideration of the executive
director in making the determination required by subsection (1)
of this section:
(a) Copies of and a
general description of the variable life insurance policies it intends to
issue;
(b) A general
description of the methods of operation of the variable life insurance business
of the insurer, including methods of distribution of policies and the names of
those persons or firms proposed to supply consulting, investment,
administrative, custodial, or distributive services to the insurer;
(c) With respect to
any separate account maintained by an insurer for any variable life insurance
policy, a statement of the investment policy the issuer intends to follow for
the investment of the assets held in such separate account, and a statement of
procedures for changing such investment policy. The statement of investment
policy shall include a description of the investment objectives intended for
the separate account;
(d) A description of
any investment advisory service contemplated as required by Section 5(10) of
this administrative regulation;
(e) A copy of the
statutes and administrative regulations of the state of domicile of the insurer
under which it is authorized to issue variable life insurance policies;
(f) Biographical
data with respect to officers and directors of the insurer on the National
Association of Insurance Commissioners Uniform Biographical Data Form; and
(g) A statement of
the insurer's actuary describing the mortality and expense risks which the
insurer will bear under the policy.
(3) Standards of
suitability. Every insurer seeking approval to enter into the variable life
insurance business in this state shall establish and maintain a written
statement specifying the standards of suitability to be used by the insurer.
Such standards of suitability shall specify that no recommendation shall be
made to an applicant to purchase a variable life insurance policy and that no
variable life insurance policy shall be issued in the absence of reasonable
grounds to believe that the purchase of such policy is not unsuitable for such
applicant on the basis of information furnished after reasonable inquiry of
such applicant concerning the applicant's insurance and investment objectives,
financial situation and needs, and any other information known to the insurer
or the agent making the recommendation.
(4) Use of sales
materials. An insurer authorized to transact variable life insurance business
in this state shall not use any sales material, advertising material, or
descriptive literature or other materials of any kind in connection with its
variable life insurance business in this state which is false, misleading,
deceptive, or inaccurate.
(5) Requirements
applicable to contractual services. Any material contract between an insurer
and suppliers of consulting, investment, administrative, sales, marketing,
custodial, or other services with respect to variable life insurance operations
shall be in writing and provide that the supplier of such services shall
furnish the executive director with any information or
reports in connection with such services which the executive
director may request in order to ascertain whether the variable
life insurance operations of the insurer are being conducted in a manner
consistent with these administrative regulations, and any other applicable law
or administrative regulations.
(6) Reports to the executive
director. Any insurer authorized to transact the business of
variable life insurance in this state shall submit to the executive
director, in addition to any other materials which may be
required by this administrative regulation or any other applicable laws or
administrative regulations:
(a) An annual
statement of the business of its separate account or accounts in such forms as
may be prescribed by the National Association of Insurance Commissioners; and
(b) Prior to use in
this state any information furnished to applicants as provided for in Section 6
of this administrative regulation; and
(c) Prior to use in
this state the form of any of the reports to policyholders as provided for in
Section 8 of this administrative regulation; and
(d) Such additional
information concerning its variable life insurance operations or its separate
accounts as the executive director may deem necessary. Any
material submitted to the executive director under this section shall
be disapproved if it is found to be false, misleading, deceptive, or inaccurate
in any material respect and, if previously distributed, the executive
director shall require the distribution of amended material.
(7) Authority of executive
director to disapprove. Any material required to be filed with
and approved by the executive director shall be subject to disapproval
if at any time it is found by him not to comply with the standards established
in this administrative regulation.
Section 3. Insurance
Policy Requirements. The commissioner shall not approve any variable life
insurance form filed pursuant to this administrative regulation unless it
conforms to the requirements of this administrative regulation.
(1) Filing of
variable life insurance policies. All variable life insurance policies, and all
riders, endorsements, applications and other documents which are to be attached
to be made a part of the policy and which relate to the variable nature of the
policy, shall be filed with the executive director
and approved by him prior to delivery or issuance for delivery in this state.
(a) The procedures
and requirements for such filing and approval shall be, to the extent
appropriate and not inconsistent with this administrative regulation, the same
as those otherwise applicable to other life insurance policies.
(b) The executive
director may approve variable life insurance policies and related
forms with provisions the executive director deems to be not less
favorable to the policyholder and the beneficiary than those required by this
administrative regulation.
(2) Mandatory policy
benefit and design requirements. Variable life insurance policies delivered or
issued for delivery in this state shall comply with the following minimum
requirements:
(a) Mortality and
expense risks shall be borne by the insurer. The mortality and expense charges
shall be subject to the maximums stated in the contract.
(b) For scheduled
premium policies, a minimum death benefit shall be provided in an amount at
least equal to the initial face amount of the policy so long as premiums are duly
paid (subject to the provisions of Section 4(4)(b) of this administrative
regulation);
(c) The policy shall
reflect the investment experience of one or more separate accounts established
and maintained by the insurer. The insurer must demonstrate that the reflection
of investment experience in the variable life insurance policy is actuarially
sound.
(d) Each variable
life insurance policy shall be credited with the full amount of the net
investment return applied to the benefit base.
(e) Any changes in
variable death benefits of each variable life insurance policy shall be
determined at least annually.
(f) The cash value
of each variable life insurance policy shall be determined at least monthly.
The method of computation of cash values and other nonforfeiture benefits, as
described either in the policy or in a statement filed with the executive
director of the state in which the policy is delivered, or issued
for delivery, shall be in accordance with actuarial procedures that recognize
the variable nature of the policy. If the policy does not contain an assumed
investment rate this demonstration shall be based on the maximum interest rate
permitted under the standard valuation law. The method of computation may
disregard incidental minimum guarantees as to the dollar amounts payable.
Incidental minimum guarantees include, for example, but are not limited to, a
guarantee that the amount payable at death or maturity shall be at least equal
to the amount that otherwise would have been payable if the net investment
return credited to the policy at all times from the date of issue had been
equal to the assumed investment rate.
(g) The computation
of values required for each variable life insurance policy may be based upon
such reasonable and necessary approximations as are acceptable to the executive
director.
(3) Mandatory policy
provisions. Every variable life insurance policy filed for approval in this
state shall contain at least the following:
(a) The cover page
or pages corresponding to the cover page of each such policy shall contain:
1. A prominent
statement in either contrasting color or in boldface type that the amount or
duration of death benefit may be variable or fixed under specified conditions;
2. A prominent
statement in either contrasting color or in boldface type that cash values may
increase or decrease in accordance with the experience of the separate account
subject to any specified minimum guarantees;
3. A statement
describing any minimum death benefit required pursuant to subsection (2)(b) of
this section;
4. The method, or a
reference to the policy provision which describes the method, for determining
the amount of insurance payable at death;
5. To the extent
permitted by state law, a captioned provision that the policyholder may return
the variable life insurance policy within ten (10) days of receipt of the
policy by the policyholder, and receive a refund equal to the sum of:
a. The difference
between the premiums paid including any policy fees or other charges and the
amounts allocated to any separate accounts under the policy; and
b. The value of the
amounts allocated to any separate accounts under the policy, on the date the
returned policy is received by the insurer or its agent. Until such time as
state law authorizes the return of payments as calculated in the preceding
sentence, the amount of the refund shall be the total of all premium payments
for such policy.
6. Such other items
as are currently required for fixed benefit life insurance policies and which
are not inconsistent with this administrative regulation.
(b)1. For scheduled
premium policies, a provision for a grace period of not less than thirty-one
(31) days from the premium due date which shall provide that when the premium
is paid within the grace period, policy values will be the same, except for the
deduction of any overdue premium, as if the premium were paid on or before the
due date.
2. For flexible
premium policies, a provision for a grace period beginning on the policy
processing day when the total charges authorized by the policy that are
necessary to keep the policy in force until the next policy processing day
exceed the amounts available under the policy to pay such charges in accordance
with the terms of the policy. Such grace period shall end on a date not less
than sixty-one (61) days after the mailing date of the report to policyholders
required by Section 8(3) of this administrative regulation. The death benefit
payable during the grace period will equal the death benefit in effect
immediately prior to such period less any overdue charges. If the policy
processing days occur monthly, the insurer may require the payment of not more
than three (3) times the charges which were due on the policy processing day on
which the amounts available under the policy were insufficient to pay all
charges authorized by the policy that are necessary to keep such policy in
force until the next policy processing day.
(c) For scheduled
premium policies, a provision that the policy will be reinstated at any time
within two (2) years from the date of default upon the written application of
the insured and evidence of insurability, including good health, satisfactory
to the insurer, unless the cash surrender value has been paid or the period of
extended insurance has expired, upon the payment of any outstanding
indebtedness arising subsequent to the end of the grace period following the
date of default together with accrued interest thereon to the date of
reinstatement and payment of an amount not exceeding the greater of:
1. All overdue
premiums with interest at a rate not exceeding that specified in the contract
and any indebtedness in effect at the end of the grace period following the
date of default with interest at a rate not exceeding that specified in the
contract; or
2. 110 percent of
the increase in cash value resulting from reinstatement plus all overdue
premiums for incidental insurance benefits with interest at a rate not
exceeding that specified in the contract. However, when making the calculations
required by subparagraphs 1 and 2 of this paragraph, any indebtedness which is
a policy loan must be repaid at interest charged in conformity with KRS
304.15-115.
(d) A full
description of the benefit base and of the method of calculation and
application of any factors used to adjust variable benefits under the policy;
(e) A provision
designating the separate account to be used and stating that:
1. The assets of
such separate account shall be available to cover the liabilities of the
general account of the insurer only to the extent that the assets of the
separate account exceed the liabilities of the separate account arising under
the variable life insurance policies supported by the separate account.
2. The assets of
such separate account shall be valued at least as often as any policy benefits
vary but at least monthly.
(f) A provision
specifying what documents constitute the entire insurance contract under state
law;
(g) A designation of
the officers who are empowered to make an agreement or representation on behalf
of the insurer and an indication that statements by the insured, or on his
behalf, shall be considered as representations and not warranties;
(h) An
identification of the owner of the insurance contract;
(i) A provision
setting forth conditions or requirements as to the designation, or change of
designation, of a beneficiary and a provision for disbursement of benefits in
the absence of a beneficiary designation;
(j) A statement of
any conditions or requirements concerning the assignment of the policy;
(k) A description of
any adjustments in policy values to be made in the event of misstatement of age
or sex of the insured;
(l) A provision that
the policy shall be incontestable by the insurer after it has been in force for
two (2) years during the lifetime of the insured, but any increase in the
amount of the policy's death benefits subsequent to the policy issue date,
which increase occurred upon a new application or request of the owner and was
subject to satisfactory proof of the insured's insurability, shall be
incontestable after any such increase has been in force, during the lifetime of
the insured, for two (2) years from the date of issue of such increase;
(m) A provision
stating that the investment policy of the separate account shall not be changed
without the approval of the insurance executive director of
the state of domicile of the insurer, and that the approval process is on file
with the commissioner of this state;
(n) A provision that
payment of variable death benefits in excess of any minimum death benefits,
cash values, policy loans, or partial withdrawals (except when used to pay
premiums) or partial surrenders may be deferred:
1. For up to six (6)
months from the date of request, if such payments are based on policy values
which do not depend on the investment performance of the separate account; or
2. Otherwise, for
any period during which the New York Stock Exchange is closed for trading
(except for normal holiday closing) or when the Securities and Exchange
Commission has determined that a state of emergency exists which may make such
payment impractical.
(o) If settlement
options are provided, at least one such option shall be provided on a fixed
basis only;
(p) A description of
the basis for computing the cash value and the surrender value under the policy
shall be included;
(q) Premiums or
charges for incidental insurance benefits shall be stated separately;
(r) Any other policy
provision required by this administrative regulation;
(s) Such other items
as are currently required for fixed benefit life insurance policies and are not
inconsistent with this administrative regulation;
(t) A provision for
nonforfeiture insurance benefits. The insurer may establish a reasonable
minimum cash value below which any nonforfeiture insurance options will not be
available.
(4) Policy loan
provisions. Every variable life insurance policy, other than term insurance
policies and pure endowment policies, delivered or issued for delivery in this
state shall contain provisions which are not less favorable to the policyholder
than the following:
(a) A provision for
policy loans after the policy has been in force for three (3) full years which
provides the following:
1. At least
seventy-five (75) percent of the policy's cash surrender value may be borrowed.
2. The amount
borrowed shall bear interest at a rate not to exceed that permitted by KRS
304.15-115.
3. Any indebtedness
shall be deducted from the proceeds payable on death.
4. Any indebtedness
shall be deducted from the cash surrender value upon surrender or in
determining any nonforfeiture benefit.
5. For scheduled
premium policies, whenever the indebtedness exceeds the cash surrender value,
the insurer shall give notice of any intent to cancel the policy if the excess
indebtedness is not repaid within thirty-one (31) days after the date of
mailing of such notice. For flexible premium policies, whenever the total
charges authorized by the policy that are necessary to keep the policy in force
until the next following policy processing day exceed the amounts available
under the policy to pay such charges, a report must be sent to the policyholder
containing the information specified by Section 8(3) of this administrative
regulation.
6. The policy may
provide that if, at any time, so long as premiums are duly paid, the variable
death benefit is less than it would have been if no loan or withdrawal had ever
been made, the policyholder may increase such variable death benefit up to what
it would have been if there had been no loan or withdrawal by paying an amount
not exceeding 110 percent of the corresponding increase in cash value and by
furnishing such evidence of insurability as the insurer may request.
7. The policy may
specify a reasonable minimum amount which may be borrowed at any time but such
minimum shall not apply to any automatic premium loan provision.
8. No policy loan
provision is required if the policy is under extended insurance nonforfeiture
option.
9. The policy loan
provisions shall be constructed so that variable life insurance policyholders
who have not exercised such provisions are not disadvantaged by the exercise
thereof.
10. Amounts paid to
the policyholders upon the exercise of any policy loan provisions shall be
withdrawn from the separate account and shall be returned to the separate
account upon repayment except that a stock insurer may provide the amounts for
policy loans from the general account.
(5) Other policy
provisions. The following provisions may in substance be included in a variable
life insurance policy or related form delivered or issued for delivery in this
state:
(a) An exclusion for
suicide within two (2) years of the issue date of the policy; provided,
however, that to the extent of the increased death benefits only, the policy
may provide an exclusion for suicide within two (2) years of any increase in
death benefits which result from an application of the owner subsequent to the
policy issue date;
(b) Incidental
insurance benefits may be offered on a fixed or variable basis;
(c) Policies issued
on a participating basis shall offer to pay dividend amounts in cash. In
addition, such policies may offer the following dividend options:
1. The amount of the
dividend may be credited against premium payments;
2. The amount of the
dividend may be applied to provide amounts of additional fixed or variable
benefit life insurance;
3. The amount of the
dividend may be deposited in the general account at a specified minimum rate of
interest;
4. The amount of the
dividend may be applied to provide paid-up amounts of fixed benefit one (1)
year term insurance;
5. The amount of the
dividend may be deposited as a variable deposit in a separate account.
(d) A provision
allowing the policyholder to elect in writing in the application for the policy
or thereafter an automatic premium loan on a basis not less favorable than that
required of policy loans under subsection (4) of this section, except that a
restriction that no more than two (2) consecutive premiums can be paid under
this provision may be imposed;
(e) A provision
allowing the policyholder to make partial withdrawals;
(f) Any other policy
provision approved by the executive director.
Section 4. Reserve
Liabilities for Variable Life Insurance. (1) Reserve liabilities for variable
life insurance policies shall be established under the standard valuation law
in accordance with actuarial procedures that recognize the variable nature of
the benefits provided and any mortality guarantees.
(2) For scheduled
premium policies, reserve liabilities for the guaranteed minimum death benefit
shall be the reserve needed to provide for the contingency of death occurring
when the guaranteed minimum death benefit exceeds the death benefit that would
be paid in the absence of the guarantee, and shall be maintained in the general
account of the insurer and shall not be less than the greater of the following
minimum reserve:
(a) The aggregate
total of the term costs, if any, covering a period of one (1) full year from
the valuation date, of the guarantee on each variable life insurance contract,
assuming an immediate one-third (1/3) depreciation in the current value of the
assets in the separate account followed by a net investment return equal to the
assumed investment rate; or
(b) The aggregate
total of the "attained age level" reserved on each variable life
insurance contract. The "attained age level" reserve on each variable
life insurance contract shall not be less than zero and shall equal the
"residue," as described in subparagraph 1 of this paragraph, of the
prior year's "attained age level" reserve on the contract, with any
such "residue" increased or decreased by a payment computed on an
attained age basis as described in subparagraph 2 of this paragraph.
1. The
"residue" of the prior year's "attained age level" reserve
on each variable life insurance contract shall not be less than zero and shall
be determined by adding interest at the valuation interest rate to such prior
year's reserve, deducting the tabular claims based on the "excess,"
if any, of the guaranteed minimum death benefit over the death benefit that
would be payable in the absence of such guarantee, and dividing the net result
by the tabular probability of survival. The "excess" referred to in
the preceding sentence shall be based on the actual level of death benefits
that would have been in effect during the preceding year in the absence of the
guarantee, taking appropriate account of the reserve assumptions regarding the
distribution of death claim payments over the year.
2. The payment
referred to in subsection (2)(b) of this section shall be computed so that the
present value of a level payment of that amount each year over the future
premium paying period of the contract is equal to (A) minus (B) minus (C),
where (A) is the present value of the future guaranteed minimum death benefits,
(B) is the present value of the future death benefits that would be payable in
the absence of such guarantee, and (C) is any "residue" as described
in subparagraph 1 of this paragraph, of the prior year's "attained age
level" reserve on such variable life insurance contract. If the contract
is paid-up, the payment shall equal (A) minus (B) minus (C). The amounts of the
future death benefits referred to in (B) shall be computed assuming a net
investment return of the separate account which may differ from the assumed
investment rate and/or the valuation interest but in no event may exceed the
maximum interest rate permitted for the valuation of life contracts.
(c) The valuation
interest rate and mortality table used in computing the two (2) minimum
reserves described in paragraphs (a) and (b) of this subsection shall conform
to permissible standards for the valuation of life insurance contracts. In
determining such minimum reserve, the company may employ suitable
approximations and estimates, including but not limited to groupings and
averages.
(3)(a) For flexible
premium policies, reserve liabilities for any guaranteed minimum death benefit
shall be maintained in the general account of the insurer and shall not be less
than the aggregate total of the term costs, if any, covering the period for in
the guarantee not otherwise provided for by the reserves held in the separate
account assuming an immediate one-third (1/3) depreciation in the current value
of the assets of the separate account followed by a net investment return equal
to the valuation interest rate.
(b) The valuation
interest rate and mortality table used in computing this additional reserve, if
any, shall conform to permissible standards for the valuation of life insurance
contracts. In determining such minimum reserve, the company may employ suitable
approximations and estimates, including but not limited to groupings and
averages.
(4) Reserve
liabilities for all fixed incidental insurance benefits and any guarantees
associated with variable accidental insurance benefits shall be maintained in
the general account and reserve liabilities for all variable aspects of the
variable incidental insurance benefits shall be maintained in a separate account,
in amounts determined in accordance with the actuarial procedures appropriate
to such benefit.
Section 5. Separate
Accounts. The following requirements apply to the establishment and
administration of variable life insurance separate accounts by any domestic
insurer:
(1) Establishment
and administration of separate accounts. Any domestic insurer issuing variable
life insurance shall establish one or more separate accounts pursuant to KRS
304.15-390.
(a) If no law or
other administrative regulation provides for the custody of separate account
assets and if such insurer is not the custodian of such separate account
assets, all contracts for custody of such assets shall be in writing and the executive
director shall have the authority to review and approve of both
the terms of any such contract and the proposed custodian prior to the transfer
of custody.
(b) Such insurer
shall not without prior written approval of the executive director
employ in any material connection with the handling of separate account assets
any person who:
1. Within the last
ten (10) years has been convicted of any felony or a misdemeanor arising out of
such person's conduct involving embezzlement, fraudulent conversion, or
misappropriation of funds or securities or involving violation of Sections
1341, 1342, or 1343 of Title 18, United States Code; or
2. Within the last
ten (10) years has been found by any state regulatory authority to have
violated or has acknowledged violation of any provision of any state insurance
law involving fraud, deceit, or knowing misrepresentation; or
3. Within the last
ten (10) years has been found by federal or state regulatory authorities to
have violated or has acknowledged violation of any provision of federal or
state securities laws involving fraud, deceit, or knowing misrepresentation.
(c) All persons with
access to the cash, securities, or other assets of the separate account shall
be under bond in the amount of not less than:
Total
Assets Under $100,000
Minimum
Amount of Bond $10,000
More
Than:
But
Not More Than:
$100,000
$600,000
$10,000
plus
4%
of assets over
$100,000
600,000
1,200,000
30,000
plus
3
1/3% of assets over
600,000
1,200,000
3,200,000
50,000
plus
3
1/2% of assets over
1,200,000
3,200,000
4,450,000
100,000
plus
2%
of assets over
3,200,000
4,450,000
6,450,000
125,000
plus
1
1/4% of assets over
4,450,000
6,450,000
90,450,000
150,000
plus
5/8%
of assets over
6,450,000
90,450,000
350,450,000
675,000
plus
3/8%
of assets over
90,450,000
350,450,000
1,070,450,000
1,625,000
plus
3/16%
of assets over
350,450,000
1,070,450,000
3,075,000
plus
3/32%
of assets over
1,070,450,000
(d) The assets of
such separate accounts shall be valued at least as often as variable benefits
are determined but in any event at least monthly.
(2) Amounts in the
separate account. The insurer shall maintain in each separate account assets
with a value at least equal to the greater of the valuation reserves for the
variable portion of the variable life insurance policies or the benefit base
for such policies.
(3) Investments by
the separate account.
(a) No sale,
exchange, or other transfer of assets may be made by an insurer or any of its
affiliates between any of its separate accounts or between any other investment
account and one (1) or more of its separate accounts unless:
1. In case of
transfer into a separate account, such transfer is made solely to establish the
account or to support the operation of the policies with respect to the
separate account to which the transfer is made; and
2. Such transfer,
whether into or from a separate account, is made by a transfer of cash; but
other assets may be transferred if approved by the executive
director in advance.
(b) The separate
account shall have sufficient net investment income and readily marketable
assets to meet anticipated withdrawals under policies funded by the account.
(4) Limitations on
ownership.
(a) A separate
account shall not purchase or otherwise acquire the securities of any issuer,
other than securities issued or guaranteed as to principal and interest by the
United States, if immediately after such purchase or acquisition the value of
such investment, together with prior investments of such account in such
security valued as required by these administrative regulations, would exceed
ten (10) percent of the value of the assets of the separate account. The executive
director may waive this limitation in writing if he believes such
waiver will not render the operation of the separate account hazardous to the
public or the policyholders in this state.
(b) No separate
account shall purchase or otherwise acquire the voting securities of any issuer
if as a result of such acquisition the insurer and its separate accounts in the
aggregate, will own more than ten (10) percent of the total issued and
outstanding voting securities of such issuer. The executive
director may waive this limitation in writing if he believes such
waiver will not render the operation of the separate account hazardous to the
public or the policyholders in this state or jeopardize the independent
operation of the issuer of such securities.
(c) The percentage
limitation specified in paragraph (a) of this subsection shall not be construed
to preclude the investment of the assets of separate accounts in shares of investment
companies registered pursuant to the Investment Company Act of 1940 or other
pools of investment assets if the investments and investment policies of such
investment companies or asset pools comply substantially with the provisions of
subsection (3) of this section and other applicable portions of the administrative
regulation.
(5) Valuation of
separate account assets. Investments of the separate account shall be valued at
their market value on the date of valuation, or at amortized cost if it approximates
market value.
(6) Separate account
investment policy. The investment policy of a separate account operated by a
domestic insurer filed under Section 2(2) of this administrative regulation
shall not be changed without first filing such change with the executive
director.
(a) Any change filed
pursuant to this section shall be effective sixty (60) days after the date it
was filed with the executive director, unless the executive director notifies
the insurer before the end of such sixty (60) day period of his disapproval of
the proposed change. At any time the executive director may, after notice and
public hearing, disapprove any change that has become effective pursuant to
this section.
(b) The executive
director may disapprove the change if he determines that the change would be
detrimental to the interests of the policyholders participating in such
separate accounts.
(7) Charges against
separate account. The insurer must disclose in writing, prior to or
contemporaneously with delivery of the policy, all charges that may be made
against the separate account, including but not limited to the following:
(a) Taxes or
reserves for taxes attributable to investment gains and income of the separate
account;
(b) Actual cost of
reasonable brokerage fees and similar direct acquisition and sale costs
incurred in the purchase or sale of separate account assets;
(c) Actuarially
determined costs of insurance (tabular costs) and the release of separate
account liabilities;
(d) Charges for
administrative expenses and investment management expenses, including internal
costs attributable to the investment management of assets of the separate
account;
(e) A charge, at a
rate specified in the policy, for mortality and expense guarantees;
(f) Any amounts in
excess of those required to be held in the separate accounts;
(g) Charges for
incidental insurance benefits.
(8) Standards of
conduct. Every insurer seeking approval to enter into the variable life
insurance business in this state shall adopt by formal action of its board of
directors a written statement specifying the standards of conduct of the
insurer, its officers, directors, employees, and affiliates with respect to the
purchase or sale of investments of separate accounts. Such standards of conduct
shall be binding on the insurer and those to whom it refers. A code or codes of
ethics meeting the requirements of Section 17(j) under the Investment Company
Act of 1940 and applicable rules and regulations thereunder shall satisfy the
provisions of this section.
(9) Conflicts of
interest. Rules under any provision of the insurance laws of this state or any
administrative regulation applicable to the officers and directors of insurance
companies with respect to conflicts of interest shall also apply to members of
any separate account's committee or other similar body.
(10) Investment
advisory services to a separate account. An insurer shall not enter into a
contract under which any person undertakes, for a fee, to regularly furnish
investment advice to such insurer with respect to its separate account
maintained for variable life insurance policies unless:
(a) The person
providing such advice is registered as an investment advisor under the
Investment Advisor Act of 1940; or
(b) The person
providing such advice is an investment manager under the Employee Retirement
Income Security Act of 1974 with respect to the assets of each employee benefit
plan allocated to the separate account; or
(c) The insurer has
filed with the executive director and continues to file annually
the following information and statements concerning the proposed advisor:
1. The name and form
of organization, state of organization, and its principal place of business;
2. The names and
addresses of its partners, officers, directors, and persons performing similar
functions or, if such an investment advisor be an individual, of such
individual;
3. A written
standard of conduct complying in substance with the requirements of subsection
(8) of this section which has been adopted by the investment advisor and is
applicable to the investment advisor, its officers, directors, and affiliates;
4. A statement
provided by the proposed advisor as to whether the advisor or any person
associated therewith:
a. Has been
convicted within ten (10) years of any felony or misdemeanor arising out of
such person's conduct as an employee, salesman, officer or director of an
insurance company, a banker, an insurance agent, a securities broker, or an
investment advisor involving embezzlement, fraudulent conversion, or
misappropriation of funds or securities, or involving the violation of Sections
1341, 1342, or 1343 of Title 18 of United States Code;
b. Has been
permanently or temporarily enjoined by an order, judgment, or decree of any
court of competent jurisdiction from acting as an investment advisor,
underwriter, broker, or dealer, or as an affiliated person or as an employee of
any investment company, bank, or insurance company, or from engaging in or
continuing any conduct or practice in connection with any such activity;
c. Has been found by
federal or state regulatory authorities to have willfully violated or have
acknowledged willful violation of any provision of federal or state securities
laws or state insurance laws or of any rule or regulation under any such laws;
or
d. Has been
censured, denied an investment advisor registration, had a registration as an
investment advisor revoked or suspended, or been barred or suspended from being
associated with an investment advisor by order of federal or state regulatory
authorities; and
(d) Such investment
advisory contract shall be in writing and provide that it may be terminated by
the insurer without penalty to the insurer or the separate account upon no more
than sixty (60) days' written notice to the investment advisor.
(e) The executive
director may, after notice and opportunity for hearing, by order
require such investment advisory contract to be terminated if he deems
continued operation thereunder to be hazardous to the public or the insurer's
policyholders.
Section 6.
Information Furnished to Applicants. An insurer delivering or issuing for
delivery in this state any variable life insurance policies shall deliver to
the applicant for such policy, and obtain a written acknowledgment of receipt
from such applicant coincident with or prior to the execution of the
application, the following information. The requirements of this section shall
be deemed to have been satisfied to the extent that a disclosure containing
information required by this section is delivered, either in the form of: a
prospectus included in the requirements of the Securities Act of 1933 and which
was declared effective by the Securities and Exchange Commission; or all
information and reports required by the Employee Retirement Income Security Act
of 1974 if the policies are exempted from the registration requirements of the
Securities Act of 1933 pursuant to Section 3(a)(2)thereof.
(1) A summary
explanation, in nontechnical terms, of the principal features of the policy,
including a description of the manner in which the variable benefits will
reflect the investment experience of the separate account and the factors which
affect such variation. Such explanation must include notices of the provision
required by Section 3(3)(a)5 and (f) of this administrative regulation.
(2) A statement of
the investment policy of the separate account, including:
(a) A description of
the investment objectives intended for the separate account and the principal
types of investments intended to be made; and
(b) Any restrictions
or limitations on the manner in which the operations of the separate account
are intended to be conducted.
(3) A statement of
the net investment return of the separate account for each of the last ten (10)
years or such lesser period as the separate account has been in existence.
(4) A statement of
the charges levied against the separate account during the previous year.
(5) A summary of the
method to be used in valuing assets held by the separate account.
(6) A summary of the
federal income tax aspects of the policy applicable to the insured, the
policyholder and the beneficiary.
(7) Illustrations of
benefits payable under the variable life insurance contract. Such illustrations
shall be prepared by the insurer and shall not include projections of past
investment experience into the future or attempted predictions of future
investment experience, provided that nothing contained herein prohibits use of
hypothetical assumed rates of return to illustrate possible levels of benefits if
it is made clear that such assumed rates are hypothetical only.
Section 7.
Applications. The application for a variable life insurance policy shall
contain:
(1) A prominent
statement that the death benefit may be variable or fixed under specified conditions;
(2) A prominent
statement that cash values may increase or decrease in accordance with the
experience of the separate account (subject to any specified minimum
guarantees); and
(3) Questions
designed to elicit information which enables the insurer to determine the
suitability of variable life insurance for the applicant.
Section 8. Reports
to Policyholders. Any insurer delivering or issuing for delivery in this state
any variable life insurance policies shall mail to each variable life insurance
policyholder at his or her last known address the following reports:
(1) Within thirty
(30) days after each anniversary of the policy, a statement or statements of
the cash surrender value, death benefit, any partial withdrawal or policy loan,
any interest charge, any optional payments allowed pursuant to Section 3(4) of
this administrative regulation under the policy computed as of the policy
anniversary date. Provided, however, that such statement may be furnished
within thirty (30) days after a specified date in each policy year so long as
the information contained therein is computed as of a date not more than sixty
(60) days prior to the mailing of such notice. This statement shall state that,
in accordance with the investment experience of the separate account, the cash
values and the variable death benefit may increase or decrease, and shall
prominently identify any value described therein which may be recomputed prior
to the next statement required by this section. If the policy guarantees that the
variable death benefit on the next policy anniversary date will not be less
than the variable death benefit specified in such statement, the statement
shall be modified to so indicate. For flexible premium policies, the report
must contain a reconciliation of the change since the previous report in cash
value and cash surrender value, if different, because of payments made (less
deductions for expense charges), withdrawals, investment experience, insurance
charges, and any other charges made against the cash value. In addition, the
report must show the projected cash value and cash surrender value, if different,
as of one (1) year from the end of the period covered by the report assuming
that:
(a) Planned periodic
premiums, if any, are paid as scheduled;
(b) Guaranteed costs
of insurance are deducted; and
(c) The net return
is equal to the guaranteed rate or, in the absence of a guaranteed rate, is not
greater than zero. If the projected value is less than zero, a warning message
must be included that states that the policy may be in danger of terminating
without value in the next twelve (12) months unless additional premium is paid.
(2) Annually, a
statement or statements including:
(a) A summary of the
financial statement of the separate account based on the annual statement last
filed with the executive director;
(b) The net
investment return of the separate account for the last year and, for each year
after the first, a comparison of the investment rate of the separate account
during the last year with the investment rate during prior years, up to a total
of not less than five (5) years when available;
(c) A list of
investments held by the separate account as of a date not earlier than the end
of the last year for which an annual statement was filed with the executive
director;
(d) Any charges
levied against the separate account during the previous year;
(e) A statement of
any change, since the last report, in the investment objective and orientation
of the separate account, in any investment restriction or material quantitative
or qualitative investment requirement applicable to the separate account or in
the investment advisor of the separate account.
(3) For flexible
premium policies, a report must be sent to the policyholder in the amounts
available under the policy on any policy processing day to pay the charges
authorized by the policy are less than the amount necessary to keep the policy
in force until the next following policy processing day. The report must
indicate the minimum payment required under the terms of the policy to keep it
in force and the length of the grace period for payment of such amount.
Section 9. Foreign
Companies. If the law or administrative regulation in the place of domicile of
a foreign company provides a degree of protection to the policyholders and the
public which is substantially similar to that provided by these administrative
regulations, the executive director to the extent deemed
appropriate by him in his discretion, may consider compliance with such law or
administrative regulation as compliance with this administrative regulation.
Section 10. (1)
Qualifications of Agents for the Sale of Variable Life Insurance. No person
shall be or act as an agent for the solicitation or sale of variable life
insurance except while duly appointed and licensed under the Kentucky Insurance
Code as a life insurance agent with respect to the insurer, and while meeting
federal law requirements for dealing in securities.
(2) Any person doing
business as agent under this section shall immediately report to the executive
director:
(a) The imposition
of any disciplinary sanction (including but not limited to suspension or
revocation of membership, suspension, revocation, or denial of registration)
imposed upon such person by any national securities exchange, national
securities association, or any federal, state, or territorial agency with
jurisdiction over securities, variable annuities, or variable life insurance.
(b) Any judgment or
injunction entered against such person on the basis of conduct deemed to have
involved unfair, false, misleading, or deceptive practices, or violation of any
securities law (whether statute or administrative regulation).
Section 11.
Severability. If any provision of this administrative regulation or the
application thereof to any person or circumstance is for any reason held to be
invalid, the remainder of the administrative regulation and the application of
such provision to other persons or circumstances shall not be affected thereby.
Section 12.
Effective Date. This administrative regulation shall become effective upon
completion of its review pursuant to KRS Chapter 13A. (11 Ky.R. 364; Am. 600;
eff. 10-9-84; TAm eff. 8-9-2007.)