                                                                                R-1001




                                   Februaryl3,    1948



Hon. George   B. Butler,  Chairman
Board of Insurance    Commissioners
Austin, Texas                                    Opinion     No.     V-   502

                                                 Re:     Whether    “Survivorship
                                                         Bonus”    or “Persistency
                                                         Bonus ” provisions      of
                                                         submitted    policies   vio-
                                                         late Article   5053,   V.C S

De&l&,      Butler:

                   Your letter   of December      19, 1947, inquires    as to
whether     or not “Survivorship     Bonus”    or “Persistency     Bonus I(
provisions     of certain  submitted   policies   violate  that portion   of
Article    5053,  V.C.S.,  which reads    as follows:

                   a.
                     . . ; nor shall any such company       issue
         any policy   containing    any special  or board con-
         tract or similar     provision,  by the terms    of which
         said policy   will share or participate     in any spe-
         cial fund derived     from a tax or a charge     against
         any portion    of the premium     on any other policy.
               II
         . . *

                  Your    letter    reads   in part    as follows:

                   “This     Department      has been split in its
         views.    I am submitting         to you a brief to me by
         Will G. Knox,       Legal   Examiner       for the Depert-
         ment,   who believes       that these policies      are incon-
         sistent  with Article       5053.    It has, however,     been
         my position,       as Life Insurance        Commissioner,
         that such ‘Survivorship          Bonus’ or ‘Persistency
         Bonus’ provisions         are not inconsistent       with the
         language    of the above statute and this Department
         has uniformly        approved     each and every policy
         containing     such provisions        presented   to it since
         the writer     took office,    so long as such policy       did
         not provide      for the payment       of the bonus out ,of
         premium      income     or other policies.
Hon.   George   B.   Butler,   Page   2 (V-   502)




                   “All of the enclosed     policies    have been ap-
         proved    by this Department      and are now being is-
         sued in Texas.      We are informed        by the compan,ies
         writing   these policies    that several     millions   of dol-
         lars of this insurance      has been written       and is now
         in force   on the lives   of Texas    people,    and that they
         have created     agency   organizations      to write the pol-
         icy in Texas.     Agents   have moved       into new terri-
         tories   solely  in order   to write these policies       in
         many cases.

                   “You will note that none of the policies          en-
         closed   herewith    contain    any provision    by the terms
         of which the bonus will be paid by a tax or charge
         against   any portion    of the premium       on any other
         policy,   as prohibited    by the Statute.     We believe
         that the statutory     inhibition   is against   the policy
         itself  containing   the provisions     prohibited.

                  “An examination     of the Statutory    language
         above quoted makes      it apparent,   the writer    thinks,
         that the creation   of a special   fund is prohibited     only
         when derived    in the prohibited    manner,    viz, ‘from
         a tax or a charge    against  any portion    of the pre-
         mium    on any other policy. ’

                    “These     companies     contend that they are
         providing      the necessary      funds to take care of the
         ‘Bonus’     provisions     other than from premium           in-
         come.     A check of the books          of some    of the com-
         panies    verifies    that they actually      take these moneys
         from    the surplus      funds of the company.         The writer
         does not believe        that the Insurance       Department      has
         any control      over the surplus       of a company,     no more
         than a Federal        Commun.ications        Commission      would
         have control       over a utility.     In other words,      surplus
         is that amount       earned    by the corporation       and it is
         moneys      no longer     belonging    to the subscribers        of
         a utility    or the policyholders        of an insurance     com-
         pany unless       the insuremce      company     is mutualized.
         In none of these instances          is the company       mutual-
         iced.

                  “The principal       objection    that has been made
         to this policy    is that it affords     too much room for
         misrepresentation        of the policy     by the agents.   We
         consider    that to be an agency        matter   to be handled
         by the .gency      Licensing     Division    of this Department,
         rather    than to go to the legality        of the policy.  . .”
   ..




Hon.    George   B.    Butler,    Page     3 (V-502)




                An illustration     of the type of provision   inquired   about
appears  in a submitted    form of policy     issued  by the National   Old
Line Insurance   Company      of Little Rock,    Arkansas.

                      On the front       page   of this     policy     is the following:

                                         “Survivorship         Bonus

                    “In the event the insured     be living and if this
          policy  be in force    other than by reason     of the opera-
          tion of one of the non-forfeiture      values   provisions    on
          the twentieth    anniversary    of the date hereof,     the Com-
          pany will pay the Survivorship        Bonus provided      under
          ‘Survivorship     Bonus,’   paragraph    1, page 4 hereof,”

                      Paragraph      1, on page        4,   is as follows:

                      “1.   Survivorship        Bonus

                    “Upon payment       of each full years        premium,
          after the first     and to and including       the twentieth,     on
          account    of each and every      policy    issued    in the same
          calendar    year as this policy       and containing       a provi-
          sion entitled     ‘Survivor  ship Bonus,’       the Company      will
          place in a fund $5.00       for each $1000 of the sum in-
          sured   of such policy,     provided     that ‘sum insured’         as
          here used shall mean the ultimate              sum insured      in
          child’s  policies     having a graduated        sum insured.      At
          the end of each calendar        year,    the fund shall be cred-
          ited with interest      at 3% on the amount         in the fund at
          the beginning      of the year.    No deduction       shall be made
          from the fund for any purpose           whatsoever,       other than
          for payments,       if any, required     by law, as by way of
          taxes or otherwise.

                     “If the insured      be living and if this policy        bd
           in force,    other than by reason        of the operation      of or@
           of the non-forfeiture        values   provisions,      on the twen-
           tieth anniversary        of the date hereof,      this policy   till
           have qualified      for a Survivorship       Bonus payable       to
           the then life owner,        and the Company        will determine
           the amount      of such bonus upon the expiration            of the
           then calendar      year.     The Survivorship        Bonus   shall
           be an amount       of money     bearing    the same proportion
           to the whole of the fund at the end of such calendar
           year,   as the sum insured         under this policy bears         to
           the total sum insured         under all policies       that shall
           have qualified      for a Survivorship       Bonus in the same
            calendar    year.
Hon.   George    B.   Butler,   Page    4 (V-502    )




                    “The whole or any part of the Survivorship
          Bonus may be used to purchase              additional    paid-up
          life insurance     on the life of the insured         hereunder
          at the net single     premium      rate for the then attain-
          ed age of the insured        according     to the American        Ex-
          perience    Table    of Mortality     with interest     at 3% per
          annum upon the proper          application     made therefor
          accompanied       by evidence     of insurability,      at stand-
          ard rates,    satisfactory     to the Company        received     at
          its Home    Office     during the lifetime       of the insured
          and within the thirty days after the date of mailing
          of notice   of the amount of such Survivorship              Bonus,
          otherwise    the Survivorship        Bonus will be paid in
          cash immediately         upon the expiration       of such thir-
          ty day period.”

                     The crux of the question          lies   in the determination          of
whether     or not the special       fund which is provided         for is “derived      from
a tax or acharge        against    any portion     of the premium        on any other pol-
icy. ” The emphasis          here,    as we see it, is on the question         of whether
premium      income     from any other policy         goes into this special        fund.    If
so, this type of policy        is prohibited     by Article     5053.    See opinions     of
the Attorney      General     dated May 23, 1913, and July 10, 1913, addressed
to Hon. B. L. Gill,        Commissioner        of Insurance      and Banking     by Hon.
C. M. Cureton,        First   Assistant    Attorney     General.      If not, the policy
is not prohibited,       as there     is no statutory     prohibition    against   a policy
participating      in a special     fund derived     solely   from    sources    other than
premiums       collected    on other policies.

                    We do not think that the fact that contributions            are made
from the surplus       to the special   fund necessarily       determines      the ques-
tion.   It is necessary       to go further    to determine       whether    the surplus
referred    to is made up of any portion         of the premiums       collected     from
other policies.      If an ixsurance     company     is prohibited    from using “any
portion   of the premium        on any other policy”     to create    a special    fund
for the benefit     of new policies    that it issues,     as we think it is by Arti-
cle 5053,    the mere    fact that part of the premiums          are denominated
“surplus”     on the books     of the company     would not make the statute           in-
applicable.      See Articles     4753 and 5036,    V.C.S.    To hold otherwise
would be permitting        such companies      to do indirectly     what they are
prohibited     from doing directly.

                 That part of Article       5053,    above quoted,     is limited     to
premium    income   and has no application         to monies     received     by a capi-
tal stock insurance    company     from other sources.           It is only in so far
as premiums     are used to create      a special      fund for such purpose,        that
Article  5053 applies.    If premium      payments        are not commingled        with
other revenue    or monies    derived    from     other sources,      Article    5053
would not prohibit    an insurance     contract      calling  for stated    contribu-
Hon.   George    B.   Butler,    Page    5 (V-   502)




tions from the fund        containing     monies        derived   from   such   sources
other than premium          payments,

                     The insurance       contracts      submitted     to us do not specify
where     the money     for the special      fund comes       from.      They do not on
their face contain any terms            by which the policies          will share     or par-
ticipate    in funds derived      from a tax or charge           against    a portion     of
the premiums        collected    on other policies.         However,       the broad word-
ing of the policies       could be interpreted         as allowing      the policy    to par-
ticipate    in a special    fund made up partly          of premiums        from    other pol-
icies,   such contributions        having a fixed relation         to the face and there-
fore to the premiums          on this and other similar           policies.      The policies
create     enough uncertainty        to require    that you examine          the method       of
accumulating       the special     fund to be certain        that it does not follow         the
practice     intended    to be prohibited      by Article      5053.     You state in your
request     that a check of the books of some              of these    companies       “veri-
fies that they actually        take these monies         from the surplus         funds of
the company.      ” If you mean,-by       this that the money          is taken from a
fund which is not made up in any part by premiums                        paid on other pol-
icies,   then such procedure          is entirely    lawful.

                    If you find that the practice         under any of these policies
is to include     any portion     of premium      payments      in the special     fund, to
bring such practice         within the spirit     and terms      of Article    4053,  you
should require       future   contributions     to the special      fund to be made
from revenues        other than premium         payments      and from      a fund which
is not commingled         with premium       payments.       Before     approving    this
form    of policy   for future years,       you may want to consider            the desir-
ability   of the face of the policy       clearly    stating   that such contributions
are to be made from          the permitted      sources     rather    than from other
premiums.

                                     SUMMARY

                    Provision     in insurance    policies    creating     a
          ‘Survivorship       Bonus”    or “Persistency       Bonus”     fund
          by contributions       having a fixed relation       to the face
          value of the policy       and therefore    to the premium
          paid and from a fund made up in whole or in part
          of premium       payments     on other policies,      violates
          Article    5053,   V.C.S.    Such provision      does not vio-
          late Article      5053 if it requires    the special      fund to
          be made wholly        of contributions     from    sources     other
          than premium        payments.     The policies      submitted       do
          not state the source        of the special    fund contribu-
          tions.   Therefore,       the Insurance    Commissioner          is
                                                                             .   -




Hon.   George   B.   Butler,   Page   6 (V-502)




         authorized    to examine   the actual practice     under
         such policies    and require   special   fund contribu-
         tions to be made from      company     revenues    and
         sources    other than premium      payments     on other
         policies.



                                                  Yours       very   truly

                                      ATTORNEYGENERALOFTEXAS




                                                  ‘Fagan       Dickson
                                                   First      Assistant

FD/JCP

                                      APPROVED            :



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