TITLE insurance

Part I. Texas Department of Insurance

Chapter 3. Life, Accident and Health Insurance and Annuities

Subchapter B. Individual Life Insurance Policy Form Checklist and Affirmative Requirements

28 TAC §3.129

The Commissioner of Insurance adopts the repeal of §3.129, concerning Individual Life Insurance Policy Form Checklist and Affirmative Requirements, without changes to the proposed repeal as published in the November 7, 1997, issue of the Texas Register (22 TexReg 10888).

The repeal of §3.129, which relates to acceleration-of-life-insurance benefits, is necessary because the Commissioner simultaneously has adopted New Subchapter LL (§§3.12001-12017), which moves rules governing acceleration-of-life-insurance benefits into their own subchapter in Chapter 3.

New subchapter LL (§§3.12001-3.12017), adopted and published elsewhere in this issue of the Texas Register , expands and revises the provisions now contained in §3.129, based on the need to implement statutory changes enacted by the 75th Legislature and at the federal level by the Health Insurance Portability and Accountability Act of 1996, the need to clearly delineate acceleration-of-life-insurance standards applicable to all forms of life insurance contracts (both individual and group life insurance policies, group certificates, and riders), and the decision to allow a new method of financing acceleration-of-life-insurance benefits, as requested by industry. Because of these additions and revisions, the rules cannot all be placed efficiently in one section, and do not belong in Subchapter B, which relates only to individual life insurance policies. The Department believes that this reorganization will enhance the clarity and readability of the rules.

No comments were received.

The repeal of §3.129 is adopted pursuant to the Insurance Code, Articles 3.42, 3.50-6 and 1.03A. Article 3.42, relating to life insurance policy form approval, and Article 3.50-6, relating to payment of accelerated life insurance benefits, each authorize the commissioner to adopt reasonable rules to implement the articles. Article 1.03A provides that the commissioner may adopt rules and regulations to execute the duties and functions of the Texas Department of Insurance only as authorized by a statute.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 9, 1998.

TRD-9801834

Caroline Scott

General Counsel and Chief Clerk

Texas Department of Insurance

Effective date: March 1, 1998

Proposal publication date: November 7, 1997

For further information, please call: (512) 463-6327

Subchapter LL. Standards for Acceleration of Life Insurance Benefits for Individual and Group Policies and Riders

28 TAC §§3.12001-3.12017

The Commissioner of Insurance adopts new Subchapter LL, §§3.12001-3.12017, relating to acceleration-of-life-insurance benefits offered in relation to both individual and group life insurance contracts (including policies, riders and certificates of coverage). The commissioner adopts the subchapter with changes to §§3.12012, 3.12013, 3.12016 and 3.12017 of the proposed text, which appeared in the November 7, 1997, issue of the Texas Register (22 TexReg 10889). The commissioner adopts §§3.12001 - 3.12011, 3.12014 and 3.12015 without changes from the proposed text, and these sections will not be republished. Rules relating to acceleration-of-life-insurance benefits previously were contained in 28 TAC §3.129 of Subchapter B of this Chapter (relating to Individual Life Insurance Policy Form Checklist and Affirmative Requirements). The commissioner adopts the repeal of §3.129, elsewhere in this issue of the Texas Register .

Acceleration-of-life-insurance benefits allow a policyholder or certificate holder to obtain payment of all or a part of the death benefit of a life insurance policy, certificate or rider prior to death of the insured, in circumstances in which the insured has a "terminal illness" (life expectancy of two years or less), "long-term care illness" (resulting in the inability to perform activities of daily living without assistance, or in impairment of cognitive ability) or "specified disease" (a disease or condition likely to cause permanent disability or premature death, such as AIDS or a malignant tumor). Rules relating to acceleration-of-life-insurance benefits previously were contained in Subchapter B (relating to Individual Life Insurance Policy Form Checklist and Affirmative Requirements). See 28 TAC §3.129. However, based on the need to implement statutory changes enacted by the 75th Legislature in House Bill 1865 ("HB1865") and at the federal level by the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), the need to clearly delineate acceleration-of-life-insurance standards for both individual and group life insurance policies, group certificates, and riders, and requests from industry to allow a new method for financing acceleration-of-life-insurance benefits, the commissioner is adopting these more comprehensive rules in their own subchapter, and is repealing §3.129 elsewhere in this issue of the Texas Register . The department believes that this reorganization will enhance the clarity and readability of the rules.

The sections are necessary to: (1) expand the circumstances under which insurers, may, at their option, offer acceleration-of-life-insurance benefits, thus enhancing financial choices for insureds facing terminal or life-threatening illnesses or conditions; (2) implement revised statutory requirements for group and individual life insurance policies passed by the 75th Legislature; (3) set uniform standards for offering acceleration-of-life-insurance benefits that will be applicable to all group and individual life insurance plans, creating a level playing field for insurers; (4) allow insurers, with proper disclosures, to offer benefits that will qualify for favorable tax treatment under federal law, as well as benefits that may not qualify for favorable tax treatment, but that are available to a broader class of insureds; and (5) ensure that acceleration-of-life-insurance benefit provisions that fund long-term care expenses conform basic definitions and eligibility triggers to those in rules setting minimum standards for long-term care insurance contracts. Many provisions of Subchapter LL are substantially similar to existing provisions in 28 TAC §3.129. The adopted rules expand the types of life insurance contracts covered by the rules; expand and revise the methods that insurers may use to calculate acceleration-of-life-insurance benefits; designate which rules relating to long-term care insurance contracts are applicable to life insurance contracts providing for payment of long-term care expenses through acceleration-of-life-insurance benefits; and set forth requirements for acceleration-of-life-insurance benefits that are marketed as qualified for favorable tax treatment under federal law.

The sections as adopted differ in some respects from the proposed sections, based on further study in response to comments. Section 3.12012 and §3.12016 have been amended to clarify that notice and disclosures required by the rules must only be provided with the document (for example, a rider) containing the acceleration-of-life-insurance provisions. Section 3.12012 and §3.12016 have been revised to state that in regard to certificate holders of group life policies, insurers must provide disclosures related to possible consequences of receiving acceleration-of-life-insurance benefits on taxes and public assistance only to certificate holders obtaining coverage on or after the effective date of these rules. Section 3.12013 has been revised to require that the disclosures and notices described in the section must be provided only with an invitation to contract (as that term is defined in rules related to advertising of life insurance contracts) containing applications that, if accepted, would provide coverage that included acceleration-of-life-insurance provisions. Section 3.12016 has been revised to include a disclosure that receipt of acceleration-of-life-insurance benefits may affect eligibility for public assistance programs. Section 3.12017 has been revised to clarify that the subchapter applies to all life insurance contracts marketed after the effective date of this subchapter (except as provided under the 90-day grace period allowed by §3.12017(b)).

Section 3.12001 states the purpose of the rules and contains a severability provision. Section 3.12002 delineates the scope of acceleration-of-life-insurance benefits that insurers may offer in Texas. Any group or individual life insurance contract may contain acceleration-of-life-insurance benefits. An insurer may accelerate death benefits of life insurance contracts if the insured has an illness or physical condition that falls within the definitions of a terminal illness, long-term care illness or specified disease, as defined by this section. Section 3.12002 also defines "life insurance contract" to include individual or group policies or riders, and certificates of coverage under a group policy or rider. Section 3.12003 requires life insurance contracts to clearly define the illness, condition, care or confinement necessary to evidence a terminal illness, long-term care illness or specified disease. It also states that conditions which may trigger acceleration-of-life-insurance benefits under this subchapter constitute total and permanent disability for the purpose of meeting statutory standards for allowing acceleration of benefits. Section 3.12004 sets standards for requiring medical diagnoses and documenting care or confinement. Section 3.12005 states that a life insurer may terminate the acceleration-of-life-insurance benefit if the contract is continued under a nonforfeiture option.

Section 3.12006 delineates allowed methods for determining benefits and charges and fees. The section retains, with some changes, the two methods contained in previous provisions governing acceleration-of-life-insurance benefits, which allowed either payment for the benefits through an additional premium or charge, or through an actuarial discount and administrative charge which are deducted, along with the amount accelerated, from the death benefit. In addition, §3.12006 allows a third option called the "lien method." Under the lien method, in instances where no additional premium or cost-of-insurance charge is payable in advance by the policy or certificate holder, insurers may consider the acceleration-of-life-insurance benefit paid to the insured, any administrative expense charges, any due and unpaid premiums and any accrued interest as a lien against the death benefit of the policy, certificate or rider. At death, the benefit payable is the total remaining death benefit proceeds in excess of the lien. The lien cannot exceed the death benefit.

Section 3.12007 contains requirements for limits on reduction of cash values made in conjunction with payment of an acceleration-of-life-insurance benefit (except as otherwise authorized under the lien method allowed by §3.12006(3)) and for calculation of minimum cash values. Section 3.12008 allows an insurer to deduct a pro rata portion of any loan on the life insurance contract from the acceleration-of-life-insurance benefit paid to the insured. Section 3.12009 states that an acceleration-of-life-insurance benefit shall be disregarded in ascertaining nonforfeiture benefits under the Insurance Code. Section 3.12010 sets standards for calculating reserves on an acceleration-of-life-insurance benefit provision and the contract containing the provision. Section 3.12011 states that acceleration-of-life-insurance benefit provisions are subject to the Insurance Code provisions prohibiting unfair, discriminatory or deceptive practices. Section 3.12012 sets forth notice and disclosure requirements for life insurance contracts containing acceleration-of-life-insurance benefits. Under §3.12012, insurers must clearly label acceleration-of-life-insurance benefit provisions, disclose if death benefits, cash values or loan values will be reduced if acceleration-of-life-insurance benefits are paid and provide the insured with a statement regarding the amount of benefits paid, the effect of such payment on the death benefit, face amount, cash value and other features of the contract and the amount, if any, of benefits that remain available for acceleration. The insurer also must include appropriate disclosures substantially similar to those promulgated under §3.12016 of the subchapter. Section 3.12013 requires that invitations to contract used in connection with marketing or selling a life insurance contract offering acceleration-of-life-insurance benefits disclose what illness, condition, care or confinement will trigger eligibility for the benefits and the effect the benefits will have on the death benefit and other values under the contract. Invitations to contract also must make appropriate disclosures substantially similar to those promulgated under §3.12016 of this subchapter.

Section 3.12014 delineates requirements related to the offer of an acceleration-of-life-insurance benefit designed to fund long-term care expenses. The section makes certain rules applicable to long-term care insurance contracts and applications for such contracts (contained in Chapter 3, Subchapter Y) applicable to long-term care features in acceleration-of-life-insurance benefit provisions. For example, the section requires that terms be defined consistently with the definitions of terms in the long-term care rules and that conditions triggering eligibility for benefits be no more restrictive than eligibility triggers in the long-term care rules. Section 3.12015 contains requirements for acceleration-of-life-insurance benefits that are represented to be tax-qualified under federal law governing such benefits. For insurers to represent that such benefits are tax-qualified under HIPAA, subtitle D, the benefits must be offered to insureds with a "qualified terminal illness," as defined by §3.12015(b)(1), or a "qualified long-term care illness," as defined by §3.12015(b)(2). To be tax-qualified, benefits paid because of a qualified long-term care illness must be used for the payment of long-term care expenses. While §3.12015 is meant to include requirements for tax-qualification contained in HIPAA, Subtitle D, the section also makes clear that insurers must meet any additional requirements promulgated under federal law for offering tax-qualified acceleration-of-life-insurance benefits. The Internal Revenue Service, not the department, determines tax qualification. However, through §3.12015, as well as the disclosure provisions of §3.12016, the department seeks to make sure that insurers offering acceleration-of-life-insurance benefits in Texas do not make material misrepresentations to applicants or insureds regarding federal tax benefits. Section 3.12016 promulgates two disclosures relating to the tax consequences of receiving acceleration-of-life-insurance benefits and a disclosure regarding the possible consequences of receiving such benefits on eligibility for public assistance. One tax disclosure relates to life insurance contracts intended to offer only federally tax-qualified acceleration-of-life-insurance benefits. The other tax disclosure relates to contracts that offer acceleration-of-life-insurance benefits that may or may not be federally tax-qualified. The appropriate disclosure tax disclosure, and the public assistance disclosure, must be included, in substantially similar form, in or attached to contracts containing acceleration-of-life-insurance provisions and invitations to contract for such provisions.

Section 3.12017 states that the subchapter applies to all life insurance contracts marketed, delivered, issued for delivery or renewed in Texas on or after the effective date of the subchapter, but provides for a transitional grace period of 90 days after the effective date.

General: A commenter commended the department for timely action in developing these rules to implement HB1865. Another commenter stated that it supported all states' adoption of the NAIC Model Accelerated Benefits Regulation and provisions in the NAIC Long-Term Care Model Act and Regulation relating to life insurance policies which accelerate the death benefit for long-term care expenses. The second commenter supports the rules to the extent that its provisions incorporate requirements from the NAIC's Accelerated Benefits and Long-Term Care Models.

Agency Response: The department appreciates the commenters' general support for these rules. Subchapter LL contains many provisions that are similar to those in the NAIC models referenced by the second commenter. However, the department has developed rules to specifically implement HB1865 and other Texas statutes, and it does not believe that the Legislature intended it to mirror the NAIC models exactly.

General: Two commenters stated that in some places, the rules did not appear to accommodate providing acceleration-of-life-insurance provisions through riders. For example, provisions in §3.12012 require certain notices to be placed on the face page of a life insurance contract, without mentioning anything about riders. The commenters stated that if an acceleration-of-life-insurance provision is in a rider, notices and disclosures relating to the provisions should be placed on or in the rider, not the policy.

Agency response. The department disagrees that the rules do not accommodate the use of riders. In §3.12002(b)(1), "life insurance contract" is defined as "an individual life insurance policy, a group life insurance policy or certificate of insurance, or a rider to an individual or group life insurance policy or group certificate of insurance." Accordingly, whenever the phrase "life insurance contract" is used, the reference is to an individual or group policy, rider or certificate, as appropriate. The department agrees with the commenters that notices and disclosures relating to acceleration-of-life-insurance provisions should only be placed in or on the document containing the provisions. The department has revised §§3.12012, 3.12013 and 3.12016 to clarify this.

Section 3.12002(b). A commenter stated that the definition of "long-term care illness" in this section was not the same as the definition of "qualified long-term care illness" in §3.12014 or the definitions typically used in long-term care polices, and should be changed to comport more closely with these definitions. Another commenter suggested adding the phrase "any two or more" before "activities of daily living" in the definition, because the definition as written does not track requirements of federal law.

Agency Response. The department does not agree that the definition, which tracks the definition of "long-term care illness" in HB1865, should be modified. As in the areas of long-term care and viatical settlements, these rules are designed to allow insurers either to offer acceleration-of-life-insurance benefits that fit within the fairly narrow confines necessary for federal tax qualifications (as set forth in §3.12014), or to allow more generous benefits that are not tax-qualified. Broad definitions of "long-term care illness" and "specified disease" allow insurers the flexibility to pay acceleration-of-life-insurance benefits to more insureds.

Section 3.12002(b). A commenter asked for clarification as to whether the definition of terminal illness (a condition reasonably expected to result in death in two years or less) allowed insurers to limit acceleration-of-life-insurance benefits to persons with, say, only one year or less of life expectancy.

Agency Response. Insurers may offer acceleration-of-life-insurance benefits only to those who are reasonably expected to live one year or less, or to no one at all. The phrase "terminal illness" is used to define a category of insureds. It does not limit an insurer's ability to design its own product.

Section 3.12002(d). A commenter suggested that insureds, and not insurers, should determine whether payments should be made in lump sums or installments. The commenter noted that some consumers may desire installment payments for tax purposes, and that other very ill insureds may need a lump sum payment.

Agency Response. The department disagrees. Subsection (d), in keeping with the rest of Subchapter LL, allows insurers flexibility in product design. The department encourages insurers to design products with the flexibility to meet the circumstances and requests of individual insureds, and it believes that market forces will ensure that this happens. The rules provide for disclosures to applicants which should alert them to explore the tax consequences of the payment options offered in the acceleration-of-life-insurance provisions. The rules thus allow informed choice at the time a consumer purchases a policy or rider containing such provisions. However, should the department receive evidence that payment option issues are presenting problems for insureds, the department will reconsider this issue for future rulemaking.

Section 3.12004. A commenter objected to provisions stating that any second opinion of a medical diagnosis required by the insurer must be paid for by the insurer, stating that insurers should not be allowed to ignore the medical opinion of the insured's physician. The commenter stated that allowing such second opinions effectively eliminates the standards for eligibility that insurers must specify pursuant to §12.003.

Agency Response. The department disagrees. Insurers in Texas have never been prohibited from obtaining a second opinion on the medical condition of an insured who wants to accelerate the benefits of his or her policy. The second opinion does not eliminate the eligibility standards; it allows insurers to confirm that its eligibility standards are met. Acceleration-of-life-insurance provisions also must disclose how insurers will resolve conflicts in diagnoses, which should prevent insurers from arbitrarily ignoring the diagnosis of the insured's physician.

Section 3.12006. A commenter objected to provisions in §3.12006 that limit administrative fees associated with accelerating benefits, stating that companies should be able to charge any amount consistent with actual costs. For the same reasons, the commenter objected to limits on the maximum percentage discounts that could be applied to benefits paid under the present value and interest only methods to insureds who have a terminal illness. The commenter supported the lien method of calculating benefits, and noted that no percentage limitations were associated with the lien method.

Agency Response. The department disagrees that the fee and percentage discount limitations are unreasonable, based on experience in reviewing acceleration-of-life-insurance provisions over the years. The maximum percentage limitations apply only to insureds who are terminally ill (two years or less life expectancy). Because terminally ill insureds have such a short life expectancy, and also are on average the most vulnerable class of insureds that will seek to accelerate benefits, the department believes reasonable limitations are appropriate. The department agrees with the commenter that the lien method of calculating benefits add a desirable payment option. Rather than projecting a discount based on life expectancy up front, the lien method allows insurers to charge a reasonable rate of interest on the amount accelerated and apply it to the remaining death benefit until such benefit is exhausted. Under this method, there is no windfall to the company if the insured dies earlier than expected, and less risk to the company if an insured lives much longer than expected. The department believes that the provisions of §3.12006(3)(D), which limit the maximum interest to that set by any one of several national standard rates, provides sufficient protections to insureds whose benefits are accelerated under the lien method.

Section 3.12012 and §3.12016. A commenter suggested that the department require disclosure that receipt of acceleration-of-life-insurance benefits could affect eligibility for Medicaid and other government benefits or entitlements.

Agency Response. The department agrees, and has added a disclosure similar to that used in the viatical settlement rules (See 28 TAC §3.10009(a)) promulgated in §3.12016 of the rules.

Section 3.12012. A commenter suggested that because of the complexity of accelerated benefit payment options, the department should require that insurers provide a 30-day free look period during which an insured could return the policy to the insurer and obtain a full premium refund.

Agency Response. The department disagrees that a free look period is necessary, because it believes that the notices and disclosures required in Subchapter LL provide applicants with sufficient information to make informed decisions before they purchase a policy or accelerate benefits. The department acknowledges that acceleration-of-life-insurance benefits can be complex, and in the course of the regulatory process, the department will continue to evaluate whether it should require a free look period, or a short period after acceleration during which a recipient of accelerated benefits could return them to the company to be reapplied to the death benefit.

Section 3.12013. Two commenters suggested that it will be overbroad and burdensome for insurers to include or attach the disclosures required by §3.12013 to every type of solicitation material relating to acceleration-of-life-insurance provisions, regardless of how generic or preliminary the solicitation. The commenters suggested that disclosures be required only with invitations to contract.

Agency Response. The department agrees that the disclosures required in §3.12013 are most appropriately limited to invitations to contract (which are defined in 28 TAC §21.114 as invitations to inquire further about the product which also include an application or enrollment form), and has revised §3.12013 accordingly. If an insurer is inviting consumers to contract, as opposed to merely piquing interest with brief advertisements or flyers, the consumers need full disclosure in order to make informed choices. Requiring all §3.12013 disclosures with every piece of marketing information would be overly burdensome to insurers. For clarity, the department has amended §3.12017 of this title (relating to Effective Date; Grace Period) to specify that the provisions of this subchapter apply to all life insurance contracts marketed after the effective date of the subchapter (except in regards to the 90-day grace period allowed by §3.12017(b)).

Section 3.12016. Commenters expressed concern about both the promulgated disclosure in subsection (a) for acceleration-of-life-insurance provision intended to only offer benefits that are tax-qualified under federal law and the one in subsection (b) for benefits that may or may not be tax-qualified. One commenter offered language that would include specific cites to federal statutes and asked if such language would be considered "substantially similar" under the rule. Two other commenters stated that the promulgated disclosure in subsection (b) was too lengthy and offered alternatives.

Agency Response. The department agrees that the disclosures should be simpler and more succinct, and has reworded them. An insurer may reword these disclosures, add cites to state or federal law or make other changes it deems necessary, as long as the substance of the disclosures used by the insurer are consistent with the substance of the promulgated language.

Section 3.12016. One commenter stated that insurers typically do not send group life certificate holders any materials upon renewal. Accordingly, if the rules require insurers to send the tax-related disclosures to every group certificate holder of group policies or riders with acceleration-of-life-insurance provisions, insurers, particularly large insurers, would incur substantial additional expense just from postage. The commenter suggested that in regards to policies in force as of the last day before the effective date of these rules, insurers be required to send the disclosures to only the group policyholder upon renewal. The commenter suggested that insurers still be required to send the disclosure to any group certificate holders obtaining group life coverage on or after the effective date of these rules.

Agency Response. The department agrees with the changes suggested by the commenter. The rules are intended to make acceleration-of-life-insurance provisions more accessible to insureds without adding significant costs to either insurers or insureds. Provisions in §§3.12012 and 3.12016 related to tax disclosures have been changed to reflect that insurers must provide the disclosures to all individual and group policyholders upon renewal of the policy or rider containing the acceleration-of-life-insurance provisions, and must provide the disclosures to certificate holders of group policies containing such revisions who obtain coverage on or after the effective date of these rules.

Section 3.12017. Two commenters commended the department for proposing a 90-day grace period. The commenters further suggested that the department put in place an expedited policy and rider approval process.

Agency Response. The department agrees that a 90-day grace period provides an appropriate transition period. Article 3.42 of the Insurance Code provides for appropriate timely approval procedures, and subsection (d) of the article allows insurers to quickly begin using forms under the "file and use" procedures. Accordingly, the department does not believe that further provisions for expedited processing are necessary.

Section 3.12017. A commenter noted that many individual life insurance policies do not renew and requested clarification as to whether such policies existing before the effective date of this subchapter would be subject to this subchapter.

Agency Response. Subchapter LL is prospective, applying only to policies marketed, issued for delivery, delivered or renewed after the effective date of this subchapter, except that insurers may utilize the 90-day grace period. Policies issued before the effective date of this subchapter that do not renew will not be subject to this subchapter.

For, with changes: Allstate Life Insurance Company, American Council of Life Insurance, Golden Rule Insurance Company, Office of Public Insurance Counsel, Texas Association of Life & Health Insurers.

Subchapter LL is adopted pursuant to the Insurance Code, Articles 3.28, §§3(g) and 11; 3.42(i) and (p); 3.44a; 3.45; 3.50-6 (as amended by House Bill 1865 enacted by the 75th Legislature and effective September 1, 1997); 3.70-8; 21.21; and 1.03A. The subchapter is adopted, in part, to coordinate the rules governing acceleration-of-life-insurance benefits in Texas with the federal tax provisions applicable to such benefits under HIPAA, Subtitle D--Treatment of Accelerated Death Benefits. Article 3.28, §3(g) and §11 provide that the Commissioner of Insurance may approve reserving tables for special benefits. Article 3.42(i) authorizes the commissioner to disapprove any policy form which is unjust or which does not comply with the Insurance Code. Article 3.42(p) authorizes the commissioner to adopt reasonable rules to implement and accomplish the purposes of Article 3.42 concerning review and approval of policy forms. Article 3.44a provides standards for nonforfeiture values. Article 3.45 prohibits insurers from implementing any mode of settlement at maturity of less value than the amounts insured on the face of the policy, plus dividend additions, if any, less any indebtedness to the company on the policy, and less any premium that may by the terms of the policy be deducted. The proposed subchapter indicates that acceleration-of-life-insurance benefits paid, any related charges, interest, discounts or liens allowed under the subchapter, and the balance of the death benefit of the life insurance contract shall constitute full settlement on maturity of the face amount of the contract. This interpretation of Article 3.45 is supported by Articles 3.50-6 and 3.70-8, both passed subsequently to Article 3.45 and both of which provide for the offer of acceleration-of-life-insurance benefits. Article 3.50-6 allows certain individual and group life insurance policies, certificates or riders to include provisions for paying acceleration-of-life-insurance benefits to persons with terminal or life- threatening illnesses or conditions, or with illnesses or conditions requiring long-term care services. Article 3.70-8 provides an exception from the application of the provisions of the Insurance Code regarding accident and health insurance for life insurance contracts which contain only such provisions relating to accident and sickness insurance as to give a special benefit in the event the insured shall become totally and permanently disabled, as defined in the contract. Article 21.21, relating to unfair competition and unfair practices, authorizes the department to establish fair and reasonable rules, regulations, or limitations for the augmentation and implementation of the article. The Insurance Code, Article 1.03A provides that the commissioner may adopt rules and regulations to execute the duties and functions of the Texas Department of Insurance as authorized by statute.

HIPAA, Subtitle D--Treatment of Accelerated Death Benefits, makes tax deductible acceleration-of-life-insurance benefits paid to persons certified by a physician to have a life expectancy of two years or less, or, under certain delineated circumstances, to persons who require long-term care services because of their illness or condition and use the acceleration-of-life-insurance benefits to pay for such services.

§3.12012.Notice and Disclosure Requirements for Life Insurance Contracts Containing Acceleration-of-life-insurance Benefits.

(a)

Except as otherwise stated in this section, every life insurance contract containing an acceleration-of-life-insurance benefit provision shall be subject to the notice and disclosure requirements in paragraphs (1)-(5) of this section.

(1)

Except as otherwise provided in this paragraph, the face of every such life insurance contract shall contain a prominent notice printed, over-printed or stamped, as appropriate, substantially as follows: "Death benefits, cash values, and loan values will be reduced if an acceleration-of-life-insurance benefit is paid." This statement shall be appropriately modified for contracts which have no cash or loan values, or in which the cash value is not reduced.

(2)

The title of any acceleration-of-life-insurance benefit shall be descriptive of the coverage provided and shall use such terms as "acceleration-of-life-insurance benefit," "accelerated benefit" or words of similar import.

(3)

At the time of the payment of a lump sum acceleration-of-life-insurance benefit, or, if periodic payments are being made, no less frequently than every 12 months, the insurer shall send a statement to the owner or holder of the life insurance contract, specifying:

(A)

the amount of benefits paid (or the amount of benefits paid since the last report);

(B)

the effect of the acceleration-of-life-insurance benefit payment on the death benefit, face amount, specified amount, accumulation values, cash values, loan amounts, future charges, and future premiums; and

(C)

the amount of benefits remaining available for acceleration.

(4)

Notice that the owner of the life insurance contract will receive the statement described in paragraph (3) of this subsection shall be included in the acceleration-of-life-insurance benefit provisions of the life insurance contract.

(5)

As appropriate, the disclosures contained in either subsection (a) or (b) of §3.12016 of this subchapter (relating to Disclosures Related to Tax Qualification of Benefits and Benefits' Effect on Public Assistance), and the disclosure contained in subsection (c) of §3.12016, or disclosures substantially similar to these disclosures, must be included on or attached to the front page of each life insurance contract subject to this subchapter, except as provided in subsection (e) of §3.12016.

(b)

The notice and disclosure requirements in subsection (a) must be provided only with the document actually containing the acceleration-of-life-insurance provisions. For example, if acceleration-of-life insurance benefits are provided through a rider to a life policy, the disclosures must only be provided with the rider, not the policy.

§3.12013. Notice and Disclosure Requirements for Marketing Materials.

(a)

Any "invitation to contract," as defined in §21.114 of this title (relating to Rules Pertaining Specifically to Life Insurance Advertising), used in the marketing, solicitation or sale of a life insurance contract containing an acceleration-of-life-insurance provision shall clearly and concisely disclose the following:

(1)

the illness, condition, care, or confinement necessary to trigger eligibility for any acceleration-of-life-insurance benefit;

(2)

the effect that an acceleration-of-life-insurance benefit provision will have on the death benefit and other values available under the life insurance contract;

(3)

The tax-related disclosures contained in either subsection (a) or (b) of §3.12016 of this subchapter (relating to Disclosures Related to Tax Qualification of Benefits and Benefits' Effect on Public Assistance), as appropriate, and the disclosure contained in subsection (c) of §3.12016, or disclosures substantially similar to these disclosures.

(b)

No insurer or agent, in marketing a life insurance contract which provides acceleration-of-life-insurance benefits, may mention, illustrate, or refer to the contract as an alternative or substitute for catastrophic major medical health insurance.

§3.12016.Disclosures Related to Tax Qualification of Benefits and Benefits' Effect on Public Assistance.

(a)

Except as provided in subsection (e) of this section, on or after the effective date of this subchapter, if an insurer markets, delivers, issues for delivery or renews a life insurance contract in Texas that provides only acceleration-of-life-insurance benefits that are intended to qualify for favorable tax treatment under federal law, the contract, and any invitation to contract as provided under §3.12013 of this title (relating to Notice and Disclosure Requirements for Marketing Materials), must include a disclosure substantially similar to the disclosure set forth in this subsection. When a series of words are separated by back-slashes (e.g. policy/certificate/rider) the insurer should choose the most appropriate word or words under the circumstances. DISCLOSURE: "The acceleration-of-life-insurance benefits offered under this policy/certificate/rider are intended to qualify for favorable tax treatment under the Internal Revenue Code of 1986. If the acceleration-of-life-insurance benefits qualify for such favorable tax treatment, the benefits will be excludable from your income and not subject to federal taxation. Tax laws relating to acceleration-of-life-insurance benefits are complex. You are advised to consult with a qualified tax advisor about circumstances under which you could receive acceleration-of-life-insurance benefits excludable from income under federal law."

(b)

Except as provided in subsection (e) of this section, on or after the effective date of this subchapter, if an insurer markets, delivers, issues for delivery or renews a life insurance contract in Texas a life insurance contract that contains an acceleration-of-life-insurance benefits provision that meets the requirements of this subchapter, but that allows benefits to be accelerated in circumstances in which such benefits would not qualify for favorable tax treatment under federal law, the contract, and any invitation to contract as provided under §3.12013 of this title (relating to Notice and Disclosure Requirements for Marketing Materials), must include a disclosure substantially similar to the disclosure set forth in this subsection. When a series of words are separated by back-slashes (e.g. policy/certificate/rider) the insurer should choose the most appropriate word or words under the circumstances. DISCLOSURE: "The acceleration-of-life-insurance benefits offered under this policy/certificate/rider may or may not qualify for favorable tax treatment under the Internal Revenue Code of 1986. Whether such benefits qualify depends on factors such as your life expectancy at the time benefits are accelerated or whether you use the benefits to pay for necessary long-term care expenses, such as nursing home care. If the acceleration-of-life-insurance benefits qualify for favorable tax treatment, the benefits will be excludable from your income and not subject to federal taxation. Tax laws relating to acceleration-of-life-insurance benefits are complex. You are advised to consult with a qualified tax advisor about circumstances under which you could receive acceleration-of-life-insurance benefits excludable from income under federal law."

(c)

Except as provided in subsection (e) of this section, on or after the effective date of this subchapter, if an insurer markets, delivers, issues for delivery or renews a life insurance contract in Texas that provides acceleration-of-life-insurance benefits, the contract, and any invitation to contract as provided under §3.12013 of this title (relating to Notice and Disclosure Requirements for Marketing Materials), must include a disclosure substantially similar to the disclosure set forth in this subsection. DISCLOSURE: "Receipt of acceleration-of-life-insurance benefits may affect your, your spouse or your family's eligibility for public assistance programs such as medical assistance (Medicaid), Aid to Families with Dependent Children (AFDC), supplementary social security income (SSI), and drug assistance programs. You are advised to consult with a qualified tax advisor and with social service agencies concerning how receipt of such a payment will affect you, your spouse and your family's eligibility for public assistance."

(d)

The disclosure requirements of this section must be provided only with the document actually containing the acceleration-of-life-insurance provisions. For example if acceleration-of-life insurance benefits are provided through a rider to a life policy, the disclosures must only be provided with the rider, not the policy.

(e)

In regards to certificates of coverage for group life insurance policies, the disclosures required by this section must be provided only to certificate holders obtaining group life coverage on or after the effective date of this subchapter.

§3.12017. Effective Date; Grace Period.

(a)

Except as otherwise provided in subsection (b) of this section, this subchapter, as adopted by the commissioner, shall apply to all life insurance contracts marketed, delivered, issued for delivery or renewed in Texas on or after the effective date of the subchapter, which shall be 20 days after the date the adopted subchapter is filed with the Office of the Secretary of State.

(b)

A life insurance contract meeting the requirements of §3.129 of this title (relating to Acceleration of Life Insurance Benefits), as effective until the effective date of this subchapter, and the Insurance Code, Article 3.50-6, as amended effective September 1, 1997, may continue to be marketed, delivered, issued for delivery or renewed in this state during a grace period lasting 90 days after the effective date of this subchapter. An insurer delivering, issuing for delivery or renewing such a life insurance contract during the grace period shall, at the option of the insured, replace the contract with a contract meeting the requirements of this subchapter at the next renewal date of the contract, without regard to the health status or medical history of the insured and without raising the insured's premium based solely on the replacement.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 9, 1998.

TRD-9801835

Caroline Scott

General Counsel and Chief Clerk

Texas Department of Insurance

Effective date: March 1, 1998

Proposal publication date: November 7, 1997

For further information, please call: (512) 463-6327

Chapter 7. Corporate and Financial Regulation

Subchapter D. Risk-Based Capital and Surplus

28 TAC §7.410

The commissioner of insurance adopts the repeal of §7.410, concerning minimum risk-based capital and surplus requirements for certain property/casualty insurers. The adoption of the repeal of the section is made without changes to the proposed text published in the November 21, 1997, issue of the Texas Register (22TexReg11229). A public hearing on the section was held on January 8, 1998.

The repeal of the section is necessary to allow the commissioner of insurance to simultaneously adopt new §7.410 which replaces the risk-based capital formula in the repealed section with a new risk-based capital formula for property/casualty insurers.

The repeal of this section will eliminate provisions pertaining to risk-based capital for property/casualty insurers which are unnecessary as a result of the adoption of new provisions pertaining to risk-based capital. Notification of the adoption of the section appears elsewhere in this issue of the Texas Register.

SUMMARY OF COMMENTS AND AGENCY RESPONSE. No comments were received regarding the adoption of the repeal this section.

The repeal is adopted under the Insurance Code, Articles, 2.01, 2.02, 2.20, 1.03A and 1.10. Article 2.01, 2.02 and 2.20 provide that the commissioner may adopt rules to require an insurer to maintain capital and surplus levels in excess of statutory levels to assure financial solvency of insurers for the protection of insurers. Article 1.03A provides the commissioner with the authorization to adopt rules and regulations for the conduct and execution of the duties and functions of the department only as authorized by a statute. Article 1.10, §5 addresses the duties of the department when an insurers solvency is impaired.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 2, 1998.

TRD-9801456

Caroline Scott

General Counsel and Chief Clerk

Texas Department of Insurance

Effective date: February 22, 1998

Proposal publication date: November 21, 1997

For further information, please call: (512) 463-6327

The commissioner of insurance adopts new §7.410 concerning minimum risk-based capital and surplus requirements for certain property/casualty insurers. The section is adopted with changes to the proposed text published in the December 26, 1997, issue of the Texas Register (22 TexReg 12671). A public hearing on the section was held on January 8, 1998.

The new section is necessary to implement an amendment to Insurance Code, Article 2.20 made by the 75th Legislature, 1997. Article 2.20(d) authorizes the commissioner to adopt rules requiring property/casualty insurers to maintain capital and surplus levels in excess of the minimum standards established in Insurance Code, Article 2.02, based on several factors, including premium volume, investment quality, risks insured and reserve adequacy. Capital and surplus required by this new section that is in excess of the minimum standards in Article 2.02 is referred to as "risk-based capital." Prior to the 1997 amendment, all property/casualty insurers which were not required by law to have capital stock were exempt from risk-based capital requirements. The 1997 amendment narrowed this exemption so that only property/casualty insurers that are not required to have capital stock and that only do business in Texas are exempt from Article 2.20(d). The new section has the same applicability as the amended Article 2.20. Also, the new section replaces existing §7.410, and the risk-based capital formula on form RBC/PC promulgated in that section, with a new property and casualty risk-based capital formula. The new section adopts by reference the 1997 NAIC Risk-Based Capital Report Including Overview and Instructions for Companies. The new formula is widely used by other state insurance regulators, therefore, the new section will improve the efficiency and uniformity of insurance regulation for those insurers that do business in more than one state. The department repealed the existing §7.410 because it believes that a single formula is more efficient and effective than separate formulas for companies that do business in more than one state and companies that only do business in Texas. Notification of the repeal of the existing section appears elsewhere in this issue of the Texas Register. The section was changed to improve consistency by hyphenating "risk-based" throughout the section and changing "rule" to "section" in subsection (g). Subsection (b) was changed to improve clarity by deleting "needed for possible" which was between "in taking" and "corrective action."

All property and casualty insurers subject to the new section will calculate their risk-based capital in accordance with the new formula adopted by reference by the new section. This includes filing the risk-based capital report with the NAIC. The new risk-based capital formula will be used by state insurance regulators to identify the minimum amount of capital and surplus appropriate for an insurance company to support its overall business operations in consideration of its size and risk exposure.

USAA commented in favor of the adoption of the new section. No other comments were received.

The new section is adopted under the Insurance Code, Articles, 2.01, 2.02, 2.20, 21.21, 1.03A and 1.10. Articles 2.01, 2.02 and 2.20 provide that the commissioner may adopt rules to require an insurer to maintain capital and surplus levels in excess of statutory levels to assure financial solvency of insurers for the protection of insurers. Article 21.21, §13 authorizes the commissioner to adopt rules necessary to regulate trade practices in the business of insurance. Article 1.10, §5 addresses the duties of the department when an insurer's solvency is impaired. Article 1.03A provides the commissioner with the authorization to adopt rules and regulations for the conduct and execution of the duties and functions by the department only as authorized by a statute.

§7.410. Minimum Risk-Based Capital and Surplus Requirements for Property/Casualty Insurers.

(a)

Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1)

Annual financial statement - The annual statement (association edition) to be used by fire and casualty (property/casualty) insurance companies, as promulgated by the NAIC and as adopted by the commissioner under this chapter.

(2)

Authorized Control Level - the number determined under the RBC formula in accordance with the RBC instructions.

(3)

Commissioner - the commissioner of insurance of the Texas Department of Insurance.

(4)

NAIC - National Association of Insurance Commissioners.

(5)

RBC formula - NAIC risk-based capital formula.

(6)

RBC instructions - 1997 NAIC Risk-Based Capital Report including Overview and Instructions for Companies published by the NAIC.

(7)

Total adjusted capital - an insurer's statutory capital and surplus as determined in accordance with the statutory accounting applicable to the annual financial statements required to be filed pursuant to the Insurance Code, and such other items, if any, as the RBC instructions provide.

(b)

Scope. This section applies to all domestic, foreign, and alien property/casualty companies subject to the provisions of the Insurance Code, Articles 2.02, 2.20, and 21.44, excluding those insurers that are only authorized to write mortgage guaranty insurance in all states in which they are licensed and excluding those insurers that write business only in this state and are not required by law to have capital stock.

(c)

Purpose. The purpose of implementing this risk-based capital and surplus provision is to require a minimum level of capital and surplus appropriate to the underwriting, financial, investment risks and other business and relevant risks assumed by an insurer.

(d)

Adoption of RBC formula by reference and filing requirements. The commissioner adopts by reference the 1997 NAIC Property and Casualty Risk-Based Capital Report including Overview and Instructions for companies which includes the RBC formula and the required diskettes. All companies subject to this section are required to file the diskettes with the NAIC in accordance with and by the due date specified in the RBC instructions.

(e)

Conflicts. In the event of a conflict between the Insurance Code, any currently existing rule of the department or any specific requirement of this section, and the RBC formula and/or the RBC instructions, the Insurance Code, rule or specific requirement of this section shall take precedence and in all respects control. It is the express intent of this section that the adoption by reference of the RBC instructions not repeal or modify or amend any rule of the department or the Insurance Code.

(f)

Actions of commissioner. The commissioner may take the following actions against an insurer who fails to maintain, at a minimum, 70% of authorized control level as calculated in accordance with the RBC instructions:

(1)

order the insurer to cease writing new business;

(2)

place the insurer in supervision or conservation;

(3)

determine the insurer to be in hazardous financial condition as provided by the Insurance Code, Article 1.32, and §8.3 of this title (relating to Hazardous Conditions);

(4)

determine the insurer to be impaired as provided by the Insurance Code, Article 1.10, §5; or

(5)

apply any other sanctions provided by the Insurance Code or Title 28 of the Texas Administrative Code.

(g)

Prohibition on Announcements. Except as otherwise required under the provisions of this section, the making, publishing, disseminating, circulating or placing before the public, or causing, directly or indirectly to be made, published, disseminated, circulated or placed before the public, in a newspaper, magazine or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio or television station, or in any other way, an advertisement, announcement or statement containing an assertion, representation or statement with regard to any component derived in the calculation, by any insurer, agent, broker or the person engaged in any manner in the insurance business would be misleading and is, therefore, prohibited.

(h)

Prohibition on use in Ratemaking. The RBC instructions and any related filing are intended solely for use by the commissioner in monitoring the solvency of property/casualty insurers subject to this section and in taking corrective action with respect to insurers and shall not be used by the commissioner for ratemaking nor considered or introduced as evidence in any rate proceeding nor used by the commissioner to calculate or derive any elements of an appropriate premium level or rate of return for any line of insurance which an insurer or any affiliate is authorized to write.

(i)

Limitations. In no event shall the requirements of this section reduce the amount of capital and surplus otherwise required by provisions of the Insurance Code or Texas Administrative Code, or by authority of the commissioner.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 2, 1998.

TRD-9801455

Caroline Scott

General Counsel and Chief Clerk

Texas Department of Insurance

Effective date: February 22, 1998

Proposal publication date: November 21, 1997

For further information, please call: (512) 463-6327