R-1001
Februaryl3, 1948
Hon. George B. Butler, Chairman
Board of Insurance Commissioners
Austin, Texas Opinion No. V- 502
Re: Whether “Survivorship
Bonus” or “Persistency
Bonus ” provisions of
submitted policies vio-
late Article 5053, V.C S
De&l&, Butler:
Your letter of December 19, 1947, inquires as to
whether or not “Survivorship Bonus” or “Persistency Bonus I(
provisions of certain submitted policies violate that portion of
Article 5053, V.C.S., which reads as follows:
a.
. . ; nor shall any such company issue
any policy containing any special or board con-
tract or similar provision, by the terms of which
said policy will share or participate in any spe-
cial fund derived from a tax or a charge against
any portion of the premium on any other policy.
II
. . *
Your letter reads in part as follows:
“This Department has been split in its
views. I am submitting to you a brief to me by
Will G. Knox, Legal Examiner for the Depert-
ment, who believes that these policies are incon-
sistent with Article 5053. It has, however, been
my position, as Life Insurance Commissioner,
that such ‘Survivorship Bonus’ or ‘Persistency
Bonus’ provisions are not inconsistent with the
language of the above statute and this Department
has uniformly approved each and every policy
containing such provisions presented to it since
the writer took office, so long as such policy did
not provide for the payment of the bonus out ,of
premium income or other policies.
Hon. George B. Butler, Page 2 (V- 502)
“All of the enclosed policies have been ap-
proved by this Department and are now being is-
sued in Texas. We are informed by the compan,ies
writing these policies that several millions of dol-
lars of this insurance has been written and is now
in force on the lives of Texas people, and that they
have created agency organizations to write the pol-
icy in Texas. Agents have moved into new terri-
tories solely in order to write these policies in
many cases.
“You will note that none of the policies en-
closed herewith contain any provision by the terms
of which the bonus will be paid by a tax or charge
against any portion of the premium on any other
policy, as prohibited by the Statute. We believe
that the statutory inhibition is against the policy
itself containing the provisions prohibited.
“An examination of the Statutory language
above quoted makes it apparent, the writer thinks,
that the creation of a special fund is prohibited only
when derived in the prohibited manner, viz, ‘from
a tax or a charge against any portion of the pre-
mium on any other policy. ’
“These companies contend that they are
providing the necessary funds to take care of the
‘Bonus’ provisions other than from premium in-
come. A check of the books of some of the com-
panies verifies that they actually take these moneys
from the surplus funds of the company. The writer
does not believe that the Insurance Department has
any control over the surplus of a company, no more
than a Federal Commun.ications Commission would
have control over a utility. In other words, surplus
is that amount earned by the corporation and it is
moneys no longer belonging to the subscribers of
a utility or the policyholders of an insurance com-
pany unless the insuremce company is mutualized.
In none of these instances is the company mutual-
iced.
“The principal objection that has been made
to this policy is that it affords too much room for
misrepresentation of the policy by the agents. We
consider that to be an agency matter to be handled
by the .gency Licensing Division of this Department,
rather than to go to the legality of the policy. . .”
..
Hon. George B. Butler, Page 3 (V-502)
An illustration of the type of provision inquired about
appears in a submitted form of policy issued by the National Old
Line Insurance Company of Little Rock, Arkansas.
On the front page of this policy is the following:
“Survivorship Bonus
“In the event the insured be living and if this
policy be in force other than by reason of the opera-
tion of one of the non-forfeiture values provisions on
the twentieth anniversary of the date hereof, the Com-
pany will pay the Survivorship Bonus provided under
‘Survivorship Bonus,’ paragraph 1, page 4 hereof,”
Paragraph 1, on page 4, is as follows:
“1. Survivorship Bonus
“Upon payment of each full years premium,
after the first and to and including the twentieth, on
account of each and every policy issued in the same
calendar year as this policy and containing a provi-
sion entitled ‘Survivor ship Bonus,’ the Company will
place in a fund $5.00 for each $1000 of the sum in-
sured of such policy, provided that ‘sum insured’ as
here used shall mean the ultimate sum insured in
child’s policies having a graduated sum insured. At
the end of each calendar year, the fund shall be cred-
ited with interest at 3% on the amount in the fund at
the beginning of the year. No deduction shall be made
from the fund for any purpose whatsoever, other than
for payments, if any, required by law, as by way of
taxes or otherwise.
“If the insured be living and if this policy bd
in force, other than by reason of the operation of or@
of the non-forfeiture values provisions, on the twen-
tieth anniversary of the date hereof, this policy till
have qualified for a Survivorship Bonus payable to
the then life owner, and the Company will determine
the amount of such bonus upon the expiration of the
then calendar year. The Survivorship Bonus shall
be an amount of money bearing the same proportion
to the whole of the fund at the end of such calendar
year, as the sum insured under this policy bears to
the total sum insured under all policies that shall
have qualified for a Survivorship Bonus in the same
calendar year.
Hon. George B. Butler, Page 4 (V-502 )
“The whole or any part of the Survivorship
Bonus may be used to purchase additional paid-up
life insurance on the life of the insured hereunder
at the net single premium rate for the then attain-
ed age of the insured according to the American Ex-
perience Table of Mortality with interest at 3% per
annum upon the proper application made therefor
accompanied by evidence of insurability, at stand-
ard rates, satisfactory to the Company received at
its Home Office during the lifetime of the insured
and within the thirty days after the date of mailing
of notice of the amount of such Survivorship Bonus,
otherwise the Survivorship Bonus will be paid in
cash immediately upon the expiration of such thir-
ty day period.”
The crux of the question lies in the determination of
whether or not the special fund which is provided for is “derived from
a tax or acharge against any portion of the premium on any other pol-
icy. ” The emphasis here, as we see it, is on the question of whether
premium income from any other policy goes into this special fund. If
so, this type of policy is prohibited by Article 5053. See opinions of
the Attorney General dated May 23, 1913, and July 10, 1913, addressed
to Hon. B. L. Gill, Commissioner of Insurance and Banking by Hon.
C. M. Cureton, First Assistant Attorney General. If not, the policy
is not prohibited, as there is no statutory prohibition against a policy
participating in a special fund derived solely from sources other than
premiums collected on other policies.
We do not think that the fact that contributions are made
from the surplus to the special fund necessarily determines the ques-
tion. It is necessary to go further to determine whether the surplus
referred to is made up of any portion of the premiums collected from
other policies. If an ixsurance company is prohibited from using “any
portion of the premium on any other policy” to create a special fund
for the benefit of new policies that it issues, as we think it is by Arti-
cle 5053, the mere fact that part of the premiums are denominated
“surplus” on the books of the company would not make the statute in-
applicable. See Articles 4753 and 5036, V.C.S. To hold otherwise
would be permitting such companies to do indirectly what they are
prohibited from doing directly.
That part of Article 5053, above quoted, is limited to
premium income and has no application to monies received by a capi-
tal stock insurance company from other sources. It is only in so far
as premiums are used to create a special fund for such purpose, that
Article 5053 applies. If premium payments are not commingled with
other revenue or monies derived from other sources, Article 5053
would not prohibit an insurance contract calling for stated contribu-
Hon. George B. Butler, Page 5 (V- 502)
tions from the fund containing monies derived from such sources
other than premium payments,
The insurance contracts submitted to us do not specify
where the money for the special fund comes from. They do not on
their face contain any terms by which the policies will share or par-
ticipate in funds derived from a tax or charge against a portion of
the premiums collected on other policies. However, the broad word-
ing of the policies could be interpreted as allowing the policy to par-
ticipate in a special fund made up partly of premiums from other pol-
icies, such contributions having a fixed relation to the face and there-
fore to the premiums on this and other similar policies. The policies
create enough uncertainty to require that you examine the method of
accumulating the special fund to be certain that it does not follow the
practice intended to be prohibited by Article 5053. You state in your
request that a check of the books of some of these companies “veri-
fies that they actually take these monies from the surplus funds of
the company. ” If you mean,-by this that the money is taken from a
fund which is not made up in any part by premiums paid on other pol-
icies, then such procedure is entirely lawful.
If you find that the practice under any of these policies
is to include any portion of premium payments in the special fund, to
bring such practice within the spirit and terms of Article 4053, you
should require future contributions to the special fund to be made
from revenues other than premium payments and from a fund which
is not commingled with premium payments. Before approving this
form of policy for future years, you may want to consider the desir-
ability of the face of the policy clearly stating that such contributions
are to be made from the permitted sources rather than from other
premiums.
SUMMARY
Provision in insurance policies creating a
‘Survivorship Bonus” or “Persistency Bonus” fund
by contributions having a fixed relation to the face
value of the policy and therefore to the premium
paid and from a fund made up in whole or in part
of premium payments on other policies, violates
Article 5053, V.C.S. Such provision does not vio-
late Article 5053 if it requires the special fund to
be made wholly of contributions from sources other
than premium payments. The policies submitted do
not state the source of the special fund contribu-
tions. Therefore, the Insurance Commissioner is
. -
Hon. George B. Butler, Page 6 (V-502)
authorized to examine the actual practice under
such policies and require special fund contribu-
tions to be made from company revenues and
sources other than premium payments on other
policies.
Yours very truly
ATTORNEYGENERALOFTEXAS
‘Fagan Dickson
First Assistant
FD/JCP
APPROVED :
jiii!Au
ATTORNEY GENERAL
Untitled Texas Attorney General Opinion
Combined Opinion