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A BILL TO BE ENTITLED
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AN ACT
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relating to rules governing the replacement of existing life |
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insurance policies and certain annuity transactions. |
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BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: |
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SECTION 1. Chapter 1104, Insurance Code, is amended by |
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adding Subchapter D as follows: |
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SUBCHAPTER D. REPLACEMENT OF LIFE INSURANCE POLICIES AND |
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CERTAIN ANNUITY TRANSACTIONS. |
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Sec. 1104.201.PURPOSE AND SCOPE. (a) The purpose of this |
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regulation is: |
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(1) to regulate the activities of insurers and agents |
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with respect to the replacement of existing life insurance and |
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annuities. |
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(2) to protect the interests of life insurance and |
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annuity purchasers by establishing minimum standards of conduct to |
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be observed in replacement or financed purchase transactions. It |
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will: |
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(A) assure that purchasers receive information |
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with which a decision can be made in his or her own best interest; |
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(B) reduce the opportunity for misrepresentation |
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and incomplete disclosure; and |
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(C) establish penalties for failure to comply |
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with requirements of this regulation. |
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(b) Unless otherwise specifically included, this regulation |
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shall not apply to transactions involving: |
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(1) credit life insurance; |
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(2) group life insurance or group annuities where |
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there is no direct solicitation of individuals by an insurance |
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agent. Direct solicitation shall not include any group meeting held |
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by an insurance agent solely for the purpose of educating or |
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enrolling individuals or, when initiated by an individual member of |
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the group, assisting with the selection of investment options |
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offered by a single insurer in connection with enrolling that |
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individual. Group life insurance or group annuity certificates |
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marketed through direct response solicitation shall be subject to |
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the provisions of Section 1104.207; |
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(3) group life insurance and annuities used to fund |
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prearranged funeral contracts; |
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(4) an application to the existing insurer that issued |
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the existing policy or contract when a contractual change or a |
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conversion privilege is being exercised; or, when the existing |
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policy or contract is being replaced by the same insurer pursuant to |
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a program filed with and approved by the commissioner; or, when a |
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term conversion privilege is exercised among corporate affiliates; |
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(5) proposed life insurance that is to replace life |
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insurance under a binding or conditional receipt issued by the same |
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company; |
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(6)(A) policies or contracts used to fund: |
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(i) an employee pension or welfare benefit |
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plan that is covered by the Employee Retirement and Income Security |
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Act (ERISA); |
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(ii) a plan described by Sections 401(a), |
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401(k) or 403(b) of the Internal Revenue Code, where the plan, for |
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purposes of ERISA, is established or maintained by an employer; |
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(iii) a governmental or church plan defined |
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in Section 414, a governmental or church welfare benefit plan, or a |
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deferred compensation plan of a state or local government or tax |
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exempt organization under Section 457 of the Internal Revenue Code; |
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or |
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(iv) a nonqualified deferred compensation |
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arrangement established or maintained by an employer or plan |
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sponsor. |
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(B) Notwithstanding Subsection 6(A), this |
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regulation shall apply to policies or contracts used to fund any |
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plan or arrangement that is funded solely by contributions an |
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employee elects to make, whether on a pre-tax or after-tax basis, |
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and where the insurer has been notified that plan participants may |
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choose from among two (2) or more insurers and there is a direct |
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solicitation of an individual employee by an insurance agent for |
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the purchase of a contract or policy. As used in this subsection, |
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direct solicitation shall not include any group meeting held by an |
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insurance agent solely for the purpose of educating individuals |
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about the plan or arrangement or enrolling individuals in the plan |
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or arrangement or, when initiated by an individual employee, |
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assisting with the selection of investment options offered by a |
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single insurer in connection with enrolling that individual |
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employee; |
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(7) where new coverage is provided under a life |
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insurance policy or contract and the cost is borne wholly by the |
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insured's employer or by an association of which the insured is a |
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member; |
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(8) existing life insurance that is a non-convertible |
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term life insurance policy that will expire in five (5) years or |
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less and cannot be renewed; |
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(9) immediate annuities that are purchased with |
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proceeds from an existing contract. Immediate annuities purchased |
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with proceeds from an existing policy are not exempted from the |
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requirements of this regulation; or |
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(10) structured settlements. |
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(c) Registered contracts shall be exempt from the |
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requirements of Sections 1104.205(a)(2) and 1104.206(a)(2) with |
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respect to the provision of illustrations or policy summaries; |
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however, premium or contract contribution amounts and |
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identification of the appropriate prospectus or offering circular |
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shall be required instead. |
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Sec. 1104.202 DEFINITIONS. (a) "Direct-response |
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solicitation" means a solicitation through a sponsoring or |
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endorsing entity or individually solely through mails, telephone, |
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the Internet or other mass communication media. |
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(b) "Existing insurer" means the insurance company whose |
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policy or contract is or will be changed or affected in a manner |
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described within the definition of "replacement." |
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(c) "Existing policy or contract" means an individual life |
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insurance policy (policy) or annuity contract (contract) in force, |
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including a policy under a binding or conditional receipt or a |
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policy or contract that is within an unconditional refund period. |
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(d) "Financed purchase" means the purchase of a new policy |
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involving the actual or intended use of funds obtained by the |
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withdrawal or surrender of, or by borrowing from values of an |
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existing policy to pay all or part of any premium due on the new |
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policy. For purposes of a regulatory review of an individual |
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transaction only, if a withdrawal, surrender or borrowing involving |
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the policy values of an existing policy is used to pay premiums on a |
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new policy owned by the same policyholder and issued by the same |
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company within four (4) months before or thirteen (13) months after |
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the effective date of the new policy, it will be deemed prima facie |
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evidence of the policyholder's intent to finance the purchase of |
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the new policy with existing policy values. This prima facie |
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standard is not intended to increase or decrease the monitoring |
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obligations contained in Section 1104.204(a)(5) of this |
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regulation. |
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(e) "Illustration" means a presentation or depiction that |
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includes non-guaranteed elements of a policy of life insurance over |
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a period of years as defined in Section 541.051 of the Insurance |
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Code. |
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(f) "Policy summary," for the purposes of this regulation; |
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(1) For policies or contracts other than universal |
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life policies, means a written statement regarding a policy or |
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contract which shall contain to the extent applicable, but need not |
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be limited to, the following information: current death benefit; |
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annual contract premium; current cash surrender value; current |
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dividend; application of current dividend; and amount of |
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outstanding loan. |
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(2) For universal life policies, means a written |
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statement that shall contain at least the following information: |
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the beginning and end date of the current report period; the policy |
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value at the end of the previous report period and at the end of the |
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current report period; the total amounts that have been credited or |
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debited to the policy value during the current report period, |
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identifying each by type (e.g., interest, mortality, expense and |
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riders); the current death benefit at the end of the current report |
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period on each life covered by the policy; the net cash surrender |
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value of the policy as of the end of the current report period; and |
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the amount of outstanding loans, if any, as of the end of the |
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current report period. |
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(g) "Agent," for the purpose of this regulation, shall be |
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defined to include agents, brokers and agents. |
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(h) "Replacing insurer" means the insurance company that |
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issues or proposes to issue a new policy or contract that replaces |
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an existing policy or contract or is a financed purchase. |
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(i) "Registered contract" means a variable annuity contract |
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or variable life insurance policy subject to the prospectus |
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delivery requirements of the Securities Act of 1933. |
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(j) "Replacement" means a transaction in which a new policy |
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or contract is to be purchased, and it is known or should be known to |
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the proposing agent, or to the proposing insurer if there is no |
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agent, that by reason of the transaction, an existing policy or |
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contract has been or is to be: |
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(1) lapsed, forfeited, surrendered or partially |
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surrendered, assigned to the replacing insurer or otherwise |
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terminated; |
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(2) converted to reduced paid-up insurance, continued |
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as extended term insurance, or otherwise reduced in value by the use |
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of nonforfeiture benefits or other policy values; |
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(3) amended so as to effect either a reduction in |
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benefits or in the term for which coverage would otherwise remain in |
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force or for which benefits would be paid; |
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(4) reissued with any reduction in cash value; or |
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(5) used in a financed purchase. |
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(k) "Sales material" means a sales illustration and any |
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other written, printed or electronically presented information |
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created, or completed or provided by the company or agent and used |
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in the presentation to the policy or contract owner related to the |
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policy or contract purchased. |
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Sec. 1104.203. DUTIES OF AGENTS. (a) An agent who |
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initiates an application shall submit to the insurer, with or as |
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part of the application, a statement signed by both the applicant |
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and the agent as to whether the applicant has existing policies or |
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contracts. If the answer is "no," the agent's duties with respect |
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to replacement are complete. |
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(b) If the applicant answered "yes" to the question |
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regarding existing coverage referred to in Subsection (a), the |
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agent shall present and read to the applicant, not later than at the |
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time of taking the application, a notice regarding replacements in |
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a form approved by the commissioner. However, no approval shall be |
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required when amendments to the notice are limited to the omission |
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of references not applicable to the product being sold or replaced. |
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The notice shall be signed by both the applicant and the agent |
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attesting that the notice has been read aloud by the agent or that |
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the applicant did not wish the notice to be read aloud (in which |
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case the agent need not have read the notice aloud) and left with |
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the applicant. |
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(c) The notice shall list all life insurance policies or |
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annuities proposed to be replaced, properly identified by name of |
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insurer, the insured or annuitant, and policy or contract number if |
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available; and shall include a statement as to whether each policy |
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or contract will be replaced or whether a policy will be used as a |
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source of financing for the new policy or contract. If a policy or |
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contract number has not been issued by the existing insurer, |
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alternative identification, such as an application or receipt |
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number, shall be listed. |
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(d) In connection with a replacement transaction the agent |
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shall leave with the applicant at the time an application for a new |
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policy or contract is completed the original or a copy of all sales |
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material. With respect to electronically presented sales material, |
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it shall be provided to the policy or contract owner in printed form |
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no later than at the time of policy or contract delivery. |
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(e) Except as provided in Section 1104.205(C), in |
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connection with a replacement transaction the agent shall submit to |
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the insurer to which an application for a policy or contract is |
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presented, a copy of each document required by this section, a |
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statement identifying any preprinted or electronically presented |
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company approved sales materials used, and copies of any |
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individualized sales materials, including any illustrations |
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related to the specific policy or contract purchased. |
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Sec. 1104.204 DUTIES OF INSURERS THAT USE AGENTS. |
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(a) Each insurer shall: |
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(1) maintain a system of supervision and control to |
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insure compliance with the requirements of this regulation that |
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shall include at least the following: |
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(A) inform its agents of the requirements of this |
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regulation and incorporate the requirements of this regulation into |
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all relevant agent training manuals prepared by the insurer; |
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(B) provide to each agent a written statement of |
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the company's position with respect to the acceptability of |
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replacements providing guidance to its agent as to the |
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appropriateness of these transactions; |
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(C) a system to review the appropriateness of |
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each replacement transaction that the agent does not indicate is in |
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accord with Subdivision (2) above; |
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(D) procedures to confirm that the requirements |
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of this regulation have been met; and |
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(E) procedures to detect transactions that are |
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replacements of existing policies or contracts by the existing |
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insurer, but that have not been reported as such by the applicant or |
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agent. Compliance with this regulation may include, but shall not |
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be limited to, systematic customer surveys, interviews, |
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confirmation letters, or programs of internal monitoring; |
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(2) have the capacity to monitor each agent's life |
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insurance policy and annuity contract replacements for that |
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insurer, and shall produce, upon request, and make such records |
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available to the Insurance Department. The capacity to monitor |
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shall include the ability to produce records for each agent's: |
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(A) life replacements, including financed |
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purchases, as a percentage of the agent's total annual sales for |
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life insurance; |
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(B) number of lapses of policies by the agent as a |
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percentage of the agent's total annual sales for life insurance; |
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(C) annuity contract replacements as a |
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percentage of the agent's total annual annuity contract sales; |
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(D) number of transactions that are unreported |
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replacements of existing policies or contracts by the existing |
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insurer detected by the company's monitoring system as required by |
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Subsection (a)(5) of this section; and |
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(E) replacements, indexed by replacing agent and |
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existing insurer; |
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(3) require with or as a part of each application for |
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life insurance or an annuity a signed statement by both the |
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applicant and the agent as to whether the applicant has existing |
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policies or contracts; |
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(4) require with each application for life insurance |
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or an annuity that indicates an existing policy or contract a |
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completed notice regarding replacements; |
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(5) when the applicant has existing policies or |
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contracts, each insurer shall be able to produce copies of any sales |
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material required by Section 1104.203(e), the basic illustration |
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and any supplemental illustrations related to the specific policy |
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or contract that is purchased, and the agent's and applicant's |
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signed statements with respect to financing and replacement for at |
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least five (5) years after the termination or expiration of the |
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proposed policy or contract; |
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(6) ascertain that the sales material and |
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illustrations required by Section 1104.203(e) of this regulation |
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meet the requirements of this regulation and are complete and |
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accurate for the proposed policy or contract; |
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(7) if an application does not meet the requirements |
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of this regulation, notify the agent and applicant and fulfill the |
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outstanding requirements; and |
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(8) maintains records in paper, photograph, |
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microprocess, magnetic, mechanical or electronic media or by any |
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process that accurately reproduces the actual document. |
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Sec. 1104.205. DUTIES OF REPLACING INSURERS THAT USE |
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AGENTS. (a) Where a replacement is involved in the transaction, |
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the replacing insurer shall: |
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(1) verify that the required forms are received and |
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are in compliance with this regulation; |
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(2) notify any other existing insurer that may be |
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affected by the proposed replacement within five (5) business days |
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of receipt of a completed application indicating replacement or |
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when the replacement is identified if not indicated on the |
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application, and mail a copy of the available illustration or |
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policy summary for the proposed policy or available disclosure |
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document for the proposed contract within five (5) business days of |
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a request from an existing insurer; |
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(3) be able to produce copies of the notification |
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regarding replacement required in Section 1104.203(b), indexed by |
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agent, for at least five (5) years or until the next regular |
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examination by the insurance department of a company's state of |
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domicile, whichever is later; and |
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(4) provide to the policy or contract owner notice of |
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the right to return the policy or contract within thirty (30) days |
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of the delivery of the contract and receive an unconditional full |
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refund of all premiums or considerations paid on it, including any |
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policy fees or charges or, in the case of a variable or market value |
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adjustment policy or contract, a payment of the cash surrender |
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value provided under the policy or contract plus the fees and other |
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charges deducted from the gross premiums or considerations or |
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imposed under such policy or contract; such notice must be included |
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in clear and conspicuous language. |
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(b) In transactions where the replacing insurer and the |
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existing insurer are the same or subsidiaries or affiliates under |
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common ownership or control, allow credit for the period of time |
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that has elapsed under the replaced policy's or contract's |
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incontestability and suicide period up to the face amount of the |
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existing policy or contract. With regard to financed purchases, |
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the credit may be limited to the amount the face amount of the |
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existing policy is reduced by the use of existing policy values to |
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fund the new policy or contract. |
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(c) If an insurer prohibits the use of sales material other |
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than that approved by the company, as an alternative to the |
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requirements made of an insurer pursuant to Section 1104.203(e), |
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the insurer may: |
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(1) require with each application a statement signed |
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by the agent that: |
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(A) represents that the agent used only |
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company-approved sales material; and |
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(B) states that copies of all sales material were |
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left with the applicant in accordance with Section 1104.203(d); and |
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(2) within ten (10) days of the issuance of the policy |
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or contract: |
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(A) notify the applicant by sending a letter or |
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by verbal communication with the applicant by a person whose duties |
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are separate from the marketing area of the insurer, that the agent |
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has represented that copies of all sales material have been left |
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with the applicant in accordance with Section 1104.203(d); |
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(B) provide the applicant with a toll free number |
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to contact company personnel involved in the compliance function if |
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such is not the case; and |
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(C) stress the importance of retaining copies of |
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the sales material for future reference; and |
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(3) be able to produce a copy of the letter or other |
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verification in the policy file for at least five (5) years after |
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the termination or expiration of the policy or contract. |
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Sec. 1104.206. DUTIES OF THE EXISTING INSURER. (a) Where |
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a replacement is involved in the transaction, the existing insurer |
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shall: |
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(1) retain and be able to produce all replacement |
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notifications received, indexed by replacing insurer, for at least |
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five (5) years or until the conclusion of the next regular |
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examination conducted by the Insurance Department of its state of |
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domicile, whichever is later. |
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(2) send a letter to the policy or contract owner of |
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the right to receive information regarding the existing policy or |
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contract values including, if available, an in force illustration |
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or policy summary if an in force illustration cannot be produced |
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within five (5) business days of receipt of a notice that an |
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existing policy or contract is being replaced. The information |
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shall be provided within five (5) business days of receipt of the |
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request from the policy or contract owner. |
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(3) upon receipt of a request to borrow, surrender or |
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withdraw any policy values, send a notice, advising the policy |
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owner that the release of policy values may affect the guaranteed |
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elements, non-guaranteed elements, face amount or surrender value |
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of the policy from which the values are released. The notice shall |
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be sent separate from the check if the check is sent to anyone other |
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than the policy owner. In the case of consecutive automatic premium |
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loans, the insurer is only required to send the notice at the time |
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of the first loan. |
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Sec. 1104.207 DUTIES OF INSURERS WITH RESPECT TO DIRECT |
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RESPONSE SOLICITATIONS. (a) In the case of an application that is |
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initiated as a result of a direct response solicitation, the |
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insurer shall require, with or as part of each completed |
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application for a policy or contract, a statement asking whether |
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the applicant, by applying for the proposed policy or contract, |
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intends to replace, discontinue or change an existing policy or |
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contract. If the applicant indicates a replacement or change is not |
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intended or if the applicant fails to respond to the statement, the |
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insurer shall send the applicant, with the policy or contract, a |
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notice regarding replacement in a form approved by the |
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commissioner. |
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(b) If the insurer has proposed the replacement or if the |
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applicant indicates a replacement is intended and the insurer |
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continues with the replacement, the insurer shall: |
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(1) provide to applicants or prospective applicants |
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with the policy or contract a notice or form approved by the |
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commissioner. In these instances the insurer may delete the |
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references to the agent, including the agent's signature, and |
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references not applicable to the product being sold or replaced, |
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without having to obtain approval of the form from the |
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commissioner. The insurer's obligation to obtain the applicant's |
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signature shall be satisfied if it can demonstrate that it has made |
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a diligent effort to secure a signed copy of the notice referred to |
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in this paragraph. The requirement to make a diligent effort shall |
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be deemed satisfied if the insurer includes in the mailing a |
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self-addressed postage prepaid envelope with instructions for the |
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return of the signed notice referred to in this section; and |
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(2) comply with the requirements of Section |
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1104.205(a)(2), if the applicant furnishes the names of the |
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existing insurers, and the requirements of Sections |
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1104.205(a)(3), 1104.25(a)(4) and 1104.205(b). |
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Sec. 1104.208. VIOLATIONS AND PENALTIES. (a) Any failure |
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to comply with this regulation shall be considered a violation of |
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Texas Insurance Code Chapter 541. Examples of violations include: |
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(1) any deceptive or misleading information set forth |
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in sales material; |
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(2) failing to ask the applicant in completing the |
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application the pertinent questions regarding the possibility of |
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financing or replacement; |
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(3) the intentional incorrect recording of an answer; |
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(4) advising an applicant to respond negatively to any |
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question regarding replacement in order to prevent notice to the |
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existing insurer; or |
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(5) advising a policy or contract owner to write |
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directly to the company in such a way as to attempt to obscure the |
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identity of the replacing agent or company. |
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(b) Policy and contract owners have the right to replace |
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existing life insurance policies or annuity contracts after |
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indicating in or as a part of applications for new coverage that |
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replacement is not their intention; however, patterns of such |
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action by policy or contract owners of the same agent shall be |
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deemed prima facie evidence of the agent's knowledge that |
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replacement was intended in connection with the identified |
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transactions, and these patterns of action shall be deemed prima |
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facie evidence of the agent's intent to violate this regulation. |
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(c) Where it is determined that the requirements of this |
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regulation have not been met the replacing insurer shall provide to |
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the policy owner an in force illustration if available or policy |
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summary for the replacement policy or available disclosure document |
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for the replacement contract and the appropriate notice regarding |
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replacements. |
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(d) Violations of this regulation shall subject the |
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violators to penalties that may include the revocation or |
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suspension of a agent's or company's license, monetary fines and the |
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forfeiture of any commissions or compensation paid to a agent as a |
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result of the transaction in connection with which the violations |
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occurred. In addition, where the commissioner has determined that |
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the violations were material to the sale, the insurer may be |
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required to make restitution, restore policy or contract values and |
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pay interest at the rate set by Section 84.050 of the Insurance Code |
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on the amount refunded in cash. |
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Sec. 1104.209. SEVERABILITY. (a) If any section or |
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portion of a section of this regulation, or its applicability to any |
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person or circumstances, is held invalid by a court, the remainder |
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of this regulation, or the applicability of its provisions to other |
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persons, shall not be affected. |
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Sec. 1104.210. AUTHORITY OF COMMISSIONER. The Commissioner |
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of Insurance may adopt reasonable rules to accomplish and enforce |
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the purpose of this chapter. |
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SECTION 2. This Act takes effect immediately if it receives |
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a vote of two-thirds of all the members elected to each house, as |
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provided by Section 39, Article III, Texas Constitution. If this |
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Act does not receive the vote necessary for immediate effect, this |
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Act takes effect September 1, 2007. |