Bill Text: MI SB0777 | 2011-2012 | 96th Legislature | Engrossed
Bill Title: Insurance; annuities; life insurance and annuity replacement regulation; enact. Amends 1956 PA 218 (MCL 500.100 - 500.8302) by adding ch. 41C.
Spectrum: Bipartisan Bill
Status: (Engrossed - Dead) 2011-11-03 - Referred To Committee On Families, Children, And Seniors [SB0777 Detail]
Download: Michigan-2011-SB0777-Engrossed.html
SB-0777, As Passed Senate, November 3, 2011
SENATE BILL No. 777
October 25, 2011, Introduced by Senators WARREN and SCHUITMAKER and referred to the Committee on Families, Seniors and Human Services.
A bill to amend 1956 PA 218, entitled
"The insurance code of 1956,"
(MCL 500.100 to 500.8302) by adding chapter 41C.
THE PEOPLE OF THE STATE OF MICHIGAN ENACT:
CHAPTER 41C
LIFE INSURANCE AND ANNUITY REPLACEMENT
Sec. 4191. As used in this chapter:
(a) "Direct-response solicitation" means a solicitation
through a sponsoring or endorsing entity or individually solely
through mails, telephone, the internet, or other mass communication
media.
(b) "Existing insurer" means the insurer whose existing policy
or contract is or will be changed or affected in a manner described
in subdivision (i).
(c) "Existing policy or contract" means an individual life
insurance policy or annuity contract in force, including a policy
under a binding or conditional receipt or a policy or contract that
is within an unconditional refund period.
(d) "Financed purchase" means the purchase of a new policy or
contract involving the actual or intended use of money obtained by
the withdrawal or surrender of, or by borrowing from values of, an
existing policy or contract to pay all or part of a premium due on
the new policy or contract. For purposes of a regulatory review of
an individual transaction only, a withdrawal, surrender, or
borrowing involving the policy values of an existing policy or
contract that is used to pay premiums on a new policy or contract
owned by the same policyholder and issued by the same insurer
within 4 months before or 13 months after the effective date of the
new policy or contract is prima facie evidence of the
policyholder's intent to finance the purchase of the new policy or
contract with existing policy values. This prima facie standard is
not intended to increase or decrease the monitoring obligations
contained in section 4194(a)(v).
(e) "Illustration" means a presentation or depiction that
includes nonguaranteed elements of a policy of life insurance over
a period of years and that is 1 of the following types of
illustration:
(i) A basic illustration, being a ledger or proposal used in
the sale of the policy that shows both guaranteed and nonguaranteed
elements.
(ii) A supplemental illustration, being an illustration
furnished in addition to a basic illustration and that may be
presented in a format differing from the basic illustration, but
may only depict a scale of nonguaranteed elements that is permitted
in a basic illustration.
(iii) An in-force illustration, being an illustration furnished
at any time after the policy that it depicts has been in force for
1 year or more.
(f) "Policy summary" means either of the following:
(i) For a policy or contract other than a universal life
policy, a written statement regarding a policy or contract that
contains at least, to the extent applicable, the current death
benefit, annual contract premium, current cash surrender value,
current dividend, application of the current dividend, and amount
of any outstanding loan.
(ii) For a universal life policy, a written statement that
contains at least the beginning and end date of the current report
period, the policy value at the end of the previous report period
and at the end of the current report period, the total amounts that
have been credited or debited to the policy value during the
current report period, identifying each by type, for example,
interest, mortality, expense and riders, the current death benefit
at the end of the current report period on each life covered by the
policy, the net cash surrender value of the policy as of the end of
the current report period, and the amount of any outstanding loans
as of the end of the current report period.
(g) "Producer" means an insurance producer as that term is
defined in section 1201.
(h) "Registered contract" means a variable annuity contract or
variable life insurance policy subject to the prospectus delivery
requirements of the securities act of 1933, 15 USC 77a to 77aa.
(i) "Replacement" means a transaction in which a new policy or
contract is to be purchased, and it is known or should be known to
the proposing producer, or to the proposing insurer if there is no
producer, that by reason of the transaction, an existing policy or
contract has been or is to be 1 of the following:
(i) Lapsed, forfeited, surrendered or partially surrendered,
assigned to the replacing insurer, or otherwise terminated.
(ii) Converted to reduced paid-up insurance, continued as
extended term insurance, or otherwise reduced in value by the use
of nonforfeiture benefits or other policy values.
(iii) Amended so as to effect either a reduction in benefits or
in the term for which coverage would otherwise remain in force or
for which benefits would be paid.
(iv) Reissued with any reduction in cash value.
(v) Used in a financed purchase.
(j) "Replacing insurer" means the insurer that issues or
proposes to issue a new policy or contract that replaces an
existing policy or contract or is a financed purchase.
(k) "Sales material" means a sales illustration or any other
written, printed, or electronically presented information created,
completed, or provided by an insurer or producer and used in a
presentation to an owner of an existing policy or contract related
to a new policy or contract.
Sec. 4192. (1) Unless otherwise specifically included, this
chapter does not apply to a transaction that involves any of the
following:
(a) Credit life insurance.
(b) Group life insurance or group annuities if there is no
direct solicitation of individuals by a producer. Direct
solicitation does not include a group meeting held by a producer
solely for the purpose of educating or enrolling individuals or, if
initiated by an individual member of the group, assisting with the
selection of investment options offered by a single insurer in
connection with enrolling the individual. Group life insurance or a
group annuity certificate marketed through direct response
solicitation is subject to section 4197.
(c) Group life insurance and annuity contracts used to fund
prearranged funeral contracts.
(d) An application to the existing insurer if a contractual
change or a conversion privilege is being exercised, if the
existing policy or contract is being replaced by the same insurer
under a program filed with and approved by the commissioner, or if
a term conversion privilege is exercised among corporate
affiliates.
(e) Proposed life insurance that is to replace life insurance
under a binding or conditional receipt issued by the same insurer.
(f) Subject to subsection (2), policies or contracts used to
fund any of the following:
(i) An employee pension or welfare benefit plan that is covered
by the employee retirement income security act of 1974, Public Law
93-406.
(ii) A plan described in section 401(a), 401(k), or 403(b) of
the internal revenue code of 1986, 26 USC 401 and 26 USC 403, if
the plan is established or maintained by an employer for purposes
of the employee retirement income security act of 1974, Public Law
93-406.
(iii) A governmental or church plan defined in section 414 of
the internal revenue code of 1986, 26 USC 414, or a deferred
compensation plan of a state or local government or tax-exempt
organization under section 457 of the internal revenue code of
1986, 26 USC 457.
(iv) A nonqualified deferred compensation arrangement
established or maintained by an employer or plan sponsor.
(g) New coverage provided under a life insurance policy or
contract the cost of which is borne wholly by the insured's
employer or by an association of which the insured is a member.
(h) Existing life insurance that is a nonconvertible term life
insurance policy that will expire in 5 years or less and cannot be
renewed.
(i) Immediate annuities that are purchased with proceeds from
an existing policy or contract. Immediate annuities purchased with
proceeds from an existing policy or contract are not exempt from
this chapter.
(j) Structured settlements.
(2) Notwithstanding subsection (1)(f), this chapter applies to
an existing policy or contract used to fund a plan or arrangement
that is funded solely by contributions an employee elects to make,
whether on a pretax or after-tax basis, if the insurer has been
notified that plan participants may choose from among 2 or more
insurers and there is a direct solicitation of an individual
employee by a producer for the purchase of a new policy or
contract. For purposes of this subsection, direct solicitation does
not include a group meeting held by an insurance producer solely
for the purpose of educating individuals about the plan or
arrangement or enrolling individuals in the plan or arrangement or,
if initiated by an individual employee, assisting with the
selection of investment options offered by a single insurer in
connection with enrolling the employee.
(3) A registered contract is exempt from the requirements of
sections 4195(1)(b) and 4196(b) with respect to the provision of
illustrations or policy summaries. However, a replacing insurer or
existing insurer, as applicable, shall provide premium or contract
contribution amounts and identify the appropriate prospectus or
offering circular instead.
Sec. 4193. (1) A producer who initiates an application shall
submit to the insurer, with or as part of the application, a
statement signed by both the applicant and the producer as to
whether the applicant has an existing policy or contract. If the
statement is that the applicant does not have an existing policy or
contract, the producer's duties with respect to replacement are
complete.
(2) If the statement under subsection (1) is that the
applicant does have an existing policy or contract, the producer
shall present and read to the applicant, not later than at the time
of taking the application, a notice regarding replacements in the
form adopted by the commissioner under section 4199(1)(a) or in
another substantially similar form approved by the commissioner.
However, approval by the commissioner of a substantially similar
form is not required if differences from the notice adopted by the
commissioner are limited to the omission of references not
applicable to the policy or contract being sold or replaced.
(3) A notice under subsection (2) shall be signed by both the
applicant and the producer, attesting that the notice has been read
aloud by the producer or that the applicant did not wish the notice
to be read aloud, in which case the producer need not have read the
notice aloud, and that the notice has been left with the applicant.
(4) The notice under subsection (2) shall list all existing
policies or contracts proposed to be replaced, properly identified
by name of insurer, the insured or annuitant, and policy or
contract number if available, and shall include a statement as to
whether each policy or contract will be replaced or whether a
policy or contract will be used as a source of financing for the
new policy or contract. If a policy or contract number has not been
issued by the existing insurer, alternative identification, such as
an application or receipt number, shall be listed.
(5) In connection with a replacement, the producer shall leave
with the applicant at the time an application for a new policy or
contract is completed the original or a copy of all sales material.
With respect to electronically presented sales material, it shall
be provided to the policy or contract owner in printed form not
later than at the time the policy or contract is delivered.
(6) Except as provided in section 4195(3), in connection with
a replacement, the producer shall submit to the insurer to which an
application for a policy or contract is presented a copy of each
document required by this section, a statement identifying any
preprinted or electronically presented company approved sales
material used, and copies of any individualized sales material,
including any illustration related to the specific policy or
contract purchased.
Sec. 4194. An insurer shall do all of the following:
(a) Maintain a system of supervision and control to insure
compliance with this chapter that does at least all of the
following:
(i) Informs its producers of the requirements of this chapter
and incorporates the requirements of this chapter into all relevant
producer training manuals prepared by the insurer.
(ii) Provides to each producer a written statement of the
insurer's position with respect to the acceptability of
replacements providing guidance to the producer as to the
appropriateness of these transactions.
(iii) Includes a system to review the appropriateness of each
replacement that a producer does not indicate is in accord with the
insurer's stated position under subparagraph (ii).
(iv) Includes procedures to confirm that the requirements of
this chapter have been met. Compliance with this subparagraph may
include, but is not limited to, systematic customer surveys,
interviews, confirmation letters, or programs of internal
monitoring.
(v) Includes procedures to detect transactions that are a
replacement of an existing policy or contract by the existing
insurer, but that have not been reported as a replacement by the
applicant or producer.
(b) Have the capacity to monitor each producer's existing
policy and contract replacements for the insurer and, on request of
the office of financial and insurance regulation, produce and make
available records of the existing policy and contract replacements.
The capacity to monitor shall include the ability to produce
records of all of the following for each producer:
(i) Life insurance policy replacements, including financed
purchases, as a percentage of the producer's total annual sales for
life insurance.
(ii) The number of lapses of life insurance policies by the
producer as a percentage of the producer's total annual sales for
life insurance.
(iii) Annuity contract replacements as a percentage of the
producer's total annual annuity contract sales.
(iv) The number of transactions that are unreported
replacements of existing policies or contracts by the existing
insurer detected by the company's monitoring system as required by
subdivision (a)(v).
(v) Replacements, indexed by replacing producer and existing
insurer.
(c) Require with or as a part of each application for life
insurance or an annuity a signed statement by both the applicant
and the producer as to whether the applicant has an existing policy
or contract.
(d) Require with each application for life insurance or an
annuity that indicates the applicant has an existing policy or
contract a completed notice regarding replacements in the form
adopted by the commissioner under section 4199(1)(a).
(e) If the applicant has an existing policy or contract, be
able to produce copies of any sales material required by section
4193(6), the basic illustration and any supplemental illustrations
related to the specific policy or contract that is purchased, and
the producer's and applicant's signed statements with respect to
financing and replacement for at least 5 years after the
termination or expiration of the new policy or contract.
(f) Ascertain that the sales material and illustrations
required by section 4193(6) meet the requirements of this chapter
and are complete and accurate for the new policy or contract.
(g) If an application does not meet the requirements of this
chapter, notify the producer and applicant and fulfill the
outstanding requirements.
(h) Maintain records in paper, photograph, microprocess,
magnetic, mechanical, or electronic media or by any process that
accurately reproduces the actual document.
Sec. 4195. (1) If a transaction involves a replacement, the
replacing insurer shall do all of the following:
(a) Verify that the required forms are received and comply
with this chapter.
(b) Notify any other existing insurer that may be affected by
the proposed replacement within 5 business days after receipt of a
completed application indicating replacement or after a replacement
is identified that was not indicated on the application, and mail a
copy of the available illustration or policy summary for the
proposed policy or available disclosure document for the proposed
contract within 5 business days after a request from an existing
insurer.
(c) Be able to produce copies of the notices regarding
replacement required in section 4193(2), indexed by producer, for
at least 5 years or until the next regular examination by the
insurance department of the insurer's state of domicile, whichever
is later.
(d) Provide to the new policy or contract owner notice of the
right to return the policy or contract within 30 days after the
delivery of the policy or contract and receive an unconditional
full refund of all premiums or consideration paid on the policy or
contract, including any policy fees or charges or, if the policy or
contract is a variable or market value adjustment policy or
contract, a payment of the cash surrender value provided under the
policy or contract plus the fees and other charges deducted from
the gross premiums or consideration or imposed under the policy or
contract. A notice under this subdivision may be included in a form
adopted by the commissioner under section 4199(1)(a) or (c).
(2) In a replacement in which the replacing insurer and the
existing insurer are the same or in which 1 is an affiliate or
subsidiary of the other, the replacing insurer shall allow credit
for the period of time that has elapsed under the existing policy's
or contract's incontestability and suicide period up to the face
amount of the existing policy or contract. With regard to financed
purchases, the credit under this subsection may be limited to the
amount the face amount of the existing policy or contract is
reduced by the use of existing policy values to fund the new policy
or contract.
(3) If an insurer prohibits the use of sales material other
than that approved by the insurer, as an alternative to the
requirements of section 4193(6), the insurer may do all of the
following:
(a) Require with each application a statement signed by the
producer that does both of the following:
(i) Represents that the producer used only company-approved
sales material.
(ii) States that copies of all sales material were left with
the applicant in accordance with section 4193(5).
(b) Within 10 days after the issuance of the policy or
contract, do all of the following:
(i) Notify the applicant, by sending a letter or by verbal
communication with the applicant by a person whose duties are
separate from the marketing area of the insurer, that the producer
has represented that copies of all sales material have been left
with the applicant in accordance with section 4193(5).
(ii) Provide the applicant with a toll-free telephone number to
contact personnel of the insurer who are involved in the compliance
function if copies of all sales material have not been left with
the applicant in accordance with section 4193(5).
(iii) Stress the importance of retaining copies of the sales
material for future reference.
(c) Be able to produce a copy of the letter under subdivision
(b)(i) or other verification in the policy file for at least 5 years
after the termination or expiration of the policy or contract.
Sec. 4196. If a transaction involves a replacement, the
existing insurer shall do all of the following:
(a) Retain and be able to produce all replacement
notifications received, indexed by replacing insurer, for at least
5 years or until the conclusion of the next regular examination
conducted by the insurance department of the insurer's state of
domicile, whichever is later.
(b) Send a letter to the policy or contract owner of the right
to receive information regarding the existing policy or contract
values including, if available, an in-force illustration or policy
summary if an in-force illustration cannot be produced within 5
business days after receipt of a notice that an existing policy or
contract is being replaced. The insurer shall provide the
information within 5 business days after receipt of the request
from the policy or contract owner.
(c) On receipt of a request to borrow, surrender, or withdraw
any policy values, send a notice advising the policy or contract
owner that the release of policy values may affect the guaranteed
elements, nonguaranteed elements, face amount, or surrender value
of the policy or contract from which the values are released. The
notice shall be sent separately from the check if the check is sent
to anyone other than the policy or contract owner. In the case of
consecutive automatic premium loans, the insurer is only required
to send the notice at the time of the first loan.
Sec. 4197. (1) If an application is initiated as a result of a
direct response solicitation, the insurer shall require, with or as
part of each completed application for a policy or contract, a
statement asking whether the applicant, by applying for the
proposed policy or contract, intends to replace, discontinue, or
change an existing policy or contract. If the applicant indicates a
replacement or change is not intended or if the applicant fails to
respond to the statement, the insurer shall send the applicant,
with the policy or contract, a notice regarding replacement adopted
by the commissioner under section 4199(1)(b) or other substantially
similar form approved by the commissioner.
(2) If an insurer has proposed a replacement for which an
application is initiated as described in subsection (1) or if the
applicant indicates under subsection (1) that a replacement is
intended and the insurer continues with the replacement, the
insurer shall do both of the following:
(a) Provide to the applicant or prospective applicant with the
policy or contract a notice, as adopted by the commissioner under
section 4199(1)(c), or another substantially similar form approved
by the commissioner. In providing a notice under this subdivision,
the insurer may delete the references to the producer, including
the producer's signature, and references not applicable to the
product being sold or replaced, without having to obtain approval
of the form from the commissioner. The insurer's obligation to
obtain the applicant's signature is satisfied if it can demonstrate
that it has made a diligent effort to secure a signed copy of the
notice. The requirement to make a diligent effort is satisfied if
the insurer includes in the mailing a self-addressed postage
prepaid envelope with instructions for the return of the signed
notice referred to in this subdivision.
(b) Comply with the requirements of section 4195(1)(b), if the
applicant furnishes the names of the existing insurers, and the
requirements of section 4195(1)(c) and (d) and (2).
Sec. 4198. (1) A failure to comply with this chapter is an
unfair trade practice for purposes of chapter 20. Examples of
violations include:
(a) Deceptive or misleading information contained in sales
material.
(b) Failing to ask the applicant in completing an application
the pertinent questions regarding the possibility of financing or
replacement.
(c) The intentional incorrect recording of an answer.
(d) Advising an applicant to respond negatively to any
question regarding replacement to prevent notice to the existing
insurer.
(e) Advising a policy or contract owner to write directly to
the company in such a way as to attempt to obscure the identity of
the replacing producer or company.
(2) A policy or contract owner has the right to replace an
existing life insurance policy or annuity contract after indicating
in or as a part of an application for a new policy or contract that
replacement is not the owner's intention. However, patterns of such
action by policy or contract owners of the same producer are prima
facie evidence of the producer's knowledge that replacement was
intended in connection with the identified transactions, and these
patterns of action are prima facie evidence of the producer's
intent to violate this chapter.
(3) If it is determined that the requirements of this chapter
have not been met, the replacing insurer shall provide to the
policy or contract owner an in-force illustration if available or a
policy summary for the replacement policy or contract or an
available disclosure document for the replacement policy or
contract and the appropriate notice regarding replacements adopted
by the commissioner under section 4199(1)(a) or (c).
(4) A violation of this chapter subjects the violator to
penalties that may include the revocation or suspension of a
producer's or insurer's license, a monetary fine, and the
forfeiture of any commissions or compensation paid to a producer as
a result of the transaction in connection with which the violation
occurred. In addition, if the commissioner determines that the
violation was material to the sale, the insurer may be required to
make restitution, restore policy or contract values, and pay simple
interest at the rate of 12% per annum on the amount refunded in
cash.
Sec. 4199. (1) The commissioner shall adopt forms as follows
to be used to satisfy the notice requirements of this chapter:
(a) A notice regarding the replacement of life insurance or
annuities to be signed by the applicant and the producer, if there
is a producer, and a copy left with the applicant.
(b) A shorter notice regarding replacing a life insurance
policy or annuity to be provided to an applicant who does not
indicate that the intended purchase of a new policy or contract is
a replacement of an existing policy or contract.
(c) A notice regarding the replacement of life insurance or
annuities to be used if the application for a new policy or
contract is initiated as a result of a direct response
solicitation.
(2) In adopting the forms under subsection (1), the
commissioner shall substantially follow the forms published by the
national association of insurance commissioners as appendices to
the life insurance and annuities replacement model regulation.
Sec. 4199a. This chapter takes effect 9 months after the
effective date of the amendatory act that added this chapter.
