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 violate 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 contract or similar provision, by the terms of which 

said policy will share or participate in any special 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 Depertment, who believes that these policies are inconsistent 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 approved by this Department and are now being issued in Texas. We are informed by the compan,ies 

writing these policies that several millions of dollars 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 policy in Texas. Agents have moved into new territories solely in order to write these policies in 

many cases. 

“You will note that none of the policies enclosed 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 premium 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 income. A check of the books of some of the companies 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 company unless the insuremce company is mutualized. 

In none of these instances is the company mutualiced. 

“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 operation of one of the non-forfeiture values provisions on 

the twentieth anniversary of the date hereof, the Company 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 provision entitled ‘Survivor ship Bonus,’ the Company will 

place in a fund $5.00 for each $1000 of the sum insured 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 credited 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 twentieth 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 attained age of the insured according to the American Experience Table of Mortality with interest at 3% per 

annum upon the proper application made therefor 

accompanied by evidence of insurability, at standard 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 thirty 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 policy. ” 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 question. 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 Article 5053, the mere fact that part of the premiums are denominated 

“surplus” on the books of the company would not make the statute inapplicable. 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 capital 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 participate in funds derived from a tax or charge against a portion of 

the premiums collected on other policies. However, the broad wording of the policies could be interpreted as allowing the policy to participate in a special fund made up partly of premiums from other policies, such contributions having a fixed relation to the face and therefore 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 “verifies 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 policies, 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 desirability 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 violate 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 contributions. 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 contributions to be made from company revenues and 

sources other than premium payments on other 

policies. 

Yours very truly 

ATTORNEYGENERALOFTEXAS 

‘Fagan Dickson 

First Assistant 

FD/JCP 

APPROVED : 

jiii!Au 

ATTORNEY GENERAL