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 ofwhich said policy will share or participate inany special fund derived from atax or a charge against any portion ofthe premium on any other policy. II

. . *
Your letter reads inpart as follows:

“This Department has been split in its views. Iam submitting toyou abrief to me by Will G. Knox, Legal Examiner for the Depertment, who believes that these policies are inconsistent with Article 5053. Ithas, however, been my position, as Life Insurance Commissioner, that such ‘Survivorship Bonus’ or ‘Persistency Bonus’ provisions are not inconsistent with the language ofthe 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 ofthe bonus out ,of premium income or other policies.Hon. George B. Butler, Page 2 (V- 502)

“All ofthe 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 ofdollars ofthis insurance has been written and is now inforce on the lives of Texas people, and that they have created agency organizations towrite the policy inTexas. Agents have moved into new territories solely in order towrite these policies in many cases.

“You will note that none of the policies enclosed herewith contain any provision by the terms ofwhich the bonus will be paid by atax or charge against any portion ofthe premium onany other policy, as prohibited by the Statute. We believe that the statutory inhibition is against the policy itself containing the provisions prohibited.

“An examination ofthe Statutory language above quoted makes itapparent, the writer thinks, that the creation ofaspecial fund is prohibited only when derived in the prohibited manner, viz, ‘from
atax or a charge against any portion ofthe premium onany other policy. ’

“These companies contend that they are providing the necessary funds to take care ofthe

‘Bonus’ provisions other than from premium income. A check ofthe books of some ofthe companies verifies that they actually take these moneys from the surplus funds ofthe company. The writer does not believe that the Insurance Department has any control over the surplus ofa company, no more than aFederal Commun.ications Commission would have control over autility. Inother words, surplus is that amount earned by the corporation and it is moneys no longer belonging tothe subscribers of
autility or the policyholders of an insurance company unless the insuremce company is mutualized. Innone of these instances is the company mutualiced.
“The principal objection that has been made to this policy is that itaffords too much room for misrepresentation ofthe policy by the agents. We consider that to be an agency matter to be handled by the .gency Licensing Division ofthis Department, rather than to go to the legality ofthe policy.

. .”..

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

An illustration ofthe type ofprovision inquired about appears inasubmitted form ofpolicy issued by the National Old Line Insurance Company of Little Rock, Arkansas.

On the front page ofthis policy is the following:

“Survivorship Bonus

“In the event the insured be living and ifthis policy be inforce other than by reason ofthe operation of one ofthe non-forfeiture values provisions on the twentieth anniversary ofthe date hereof, the Company will pay the Survivorship Bonus provided under

‘Survivorship Bonus,’ paragraph 1,page 4hereof,”

Paragraph 1,onpage 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 ofeach and every policy issued in the same calendar year as this policy and containing aprovision entitled ‘Survivor ship Bonus,’ the Company will place inafund $5.00 for each $1000 ofthe sum insured of such policy, provided that ‘sum insured’ as here used shall mean the ultimate sum insured in child’s policies having agraduated sum insured. At the end of each calendar year, the fund shall be credited with interest at 3% onthe amount inthe fund at the beginning ofthe year. No deduction shall be made from the fund for any purpose whatsoever, other than for payments, ifany, required by law, as by way of taxes or otherwise.

“If the insured be living and ifthis policy 

## bd inforce, other than by reason ofthe operation of or@ of the non-forfeiture values provisions, onthe twentieth anniversary ofthe date hereof, this policy till have qualified for aSurvivorship Bonus payable to the then life owner, and the Company will determine the amount of such bonus upon the expiration ofthe then calendar year. The Survivorship Bonus shall be an amount ofmoney bearing the same proportion to the whole ofthe 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 aSurvivorship Bonus inthe same calendar year.Hon. George B. Butler, Page 4 (V-502 )

“The whole or any part ofthe Survivorship Bonus may be used to purchase additional paid-up life insurance on the life ofthe insured hereunder at the net single premium rate for the then attained age of the insured according tothe American Experience Table ofMortality 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 ofthe insured and within the thirty days after the date ofmailing ofnotice 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 ofthe premium onany other policy. ” The emphasis here, as we see it, is on the question ofwhether premium income from any other policy goes into this special fund. If so, this type ofpolicy 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. Ifnot, the policy is not prohibited, as there is no statutory prohibition against apolicy participating ina 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 ofany portion ofthe premiums collected from other policies. Ifan ixsurance company is prohibited from using “any portion ofthe premium onany other policy” to create a special fund for the benefit ofnew policies that it issues, as we think it is by Article 5053, the mere fact that part ofthe premiums are denominated

“surplus” on the books ofthe 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 ofArticle 5053, above quoted, is limited to premium income and has no application to monies received by a capital stock insurance company from other sources. Itis only in so far
as premiums are used to create a special fund for such purpose, that Article 5053 applies. Ifpremium 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 infunds derived from atax or charge against aportion of the premiums collected on other policies. However, the broad wording of the policies could be interpreted as allowing the policy to participate ina special fund made uppartly ofpremiums from other policies, such contributions having afixed relation to the face and therefore to the premiums onthis 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 itdoes not follow the practice intended tobe prohibited by Article 5053. You state inyour request that a check ofthe books of some of these companies “verifies that they actually take these monies from the surplus funds of the company. ” Ifyou mean,-by this that the money is taken from a fund which is not made up inany part by premiums paid on other policies, then such procedure is entirely lawful.
Ifyou find that the practice under any of these policies is to include any portion ofpremium payments inthe special fund, to bring such practice within the spirit and terms ofArticle 4053, you should require future contributions to the special fund tobe made from revenues other than premium payments and from afund which is not commingled with premium payments. Before approving this form ofpolicy for future years, you may want to consider the desirability ofthe 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 afixed relation tothe face value ofthe policy and therefore to the premium paid and from afund made upinwhole or inpart ofpremium payments on other policies, violates Article 5053, V.C.S. Such provision does not violate Article 5053 if itrequires the special fund to be made wholly ofcontributions from sources other than premium payments. The policies submitted do not state the source ofthe 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 :



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ATTORNEY GENERAL