806 KAR 15:030. Variable life insurance

Link to law: http://www.lrc.ky.gov/kar/806/015/030.htm
Published: 2015

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      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.)