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Subchapter 002 : Life Insurance and Annuity Contracts(Cite as: 8 V.S.A. § 3731)
§ 3731. Standard provisions required
No policy of life insurance, other than group and pure endowments with or without return of premiums or of premiums and interest, shall be delivered or issued for delivery in this State unless it contains in substance all of the applicable provisions required by this subchapter or corresponding provisions which in the opinion of the Commissioner are more favorable to the policyholder. This subchapter shall not apply to any provision of a life insurance policy, or contract supplemental thereto, relating to disability benefits or to additional benefits in the event of death by accident or accidental means; and any of such provisions or portions thereof not applicable to single premium or nonparticipating or term policies shall to that extent not be incorporated therein.
(1) Payment of premiums. There shall be a provision relating to the time and place of payment of premiums.
(2) Grace period. There shall be a provision that a grace period of 30 days, or, at the option of the insurer, of one month of not less than 30 days, or of four weeks in the case of industrial life insurance policies the premiums for which are payable more frequently than monthly, shall be allowed within which the payment of any premium after the first may be made, during which period of grace the policy shall continue in full force; but if a claim arises under the policy during such period of grace the amount of any premium due or overdue may be deducted from the policy proceeds.
(3) Entire contract. There shall be a provision that, except as otherwise expressly provided by law, the policy and the application therefor, if a copy of such application is endorsed upon or attached to the policy when issued, shall constitute the entire contract between the parties, and that all statements contained in the application shall, in the absence of fraud, be deemed representations and not warranties.
(4) Incontestability. There shall be a provision that the policy (exclusive of provisions relating to disability benefits or to additional benefits in the event of death by accident or accidental means) shall be incontestable, except for nonpayment of premiums, after it has been in force during the lifetime of the insured for a period of two years from its date of issue.
(5) Misstatement of age. There shall be a provision that if the age of the insured or of any other person whose age is considered in determining the premium or benefit has been misstated, any amount payable or benefit accruing under the policy shall be such as the premium would have purchased at the correct age or ages.
(A) There shall be a provision in participating policies that, beginning not later than the end of the third policy year, the insurer shall annually ascertain and apportion the divisible surplus, if any, that will accrue on the policy anniversary or other dividend date specified in the policy provided the policy is in force and all premiums to that date are paid. Except as hereinafter provided, any dividend becoming payable shall at the option of the party entitled to elect such option be either:
(i) Payable in cash.
(ii) Applied to any one of such other dividend options as may be provided by the policy. If any such other dividend options are provided, the policy shall further state which option shall be automatically effective if such party shall not have elected some other option. If the policy specifies a period within which such other dividend option may be elected, such period shall be not less than 30 days following the date on which such dividend is due and payable. The annually apportioned dividend shall be deemed to be payable in cash within the meaning of subdivision (i) of this subdivision (6)(A) even though the policy provides that payment of such dividend is to be deferred for a specified period, provided such period does not exceed six years from the date of apportionment and that interest will be added to such dividend at a specified rate; and provided, further, that upon maturity, surrender or other expiry of the policy, any such dividend and interest thereon shall not be forfeited to the insurer.
(B) In participating industrial life insurance policies, in lieu of the provisions required in subdivision (i) of this subdivision (6)(A), there shall be a provision that, beginning not later than the end of the fifth policy year, the policy shall participate annually in the divisible surplus, if any, in the manner set forth in the policy.
(C) If a participating policy provides that the benefit under any paid-up nonforfeiture provision is to be participating, it may provide that any divisible surplus becoming payable or apportioned while the insurance is in force under such nonforfeiture provision shall be applied in the manner set forth in the policy.
(7) Policy loans.
(A) There shall be a provision that after three full years’ premiums have been paid and after the policy has a cash surrender value and while no premium is in default beyond the grace period for payment, the insurer will advance, on the sole security thereof, an amount equal to or, at the option of the party entitled thereto, less than the loan value of the policy at a policy loan interest rate with respect to which a policy shall contain one of the following policy loan interest rate provisions.
(i) There may be a provision that a policy loan shall bear interest at a specified rate not exceeding eight percent per annum.
(ii) There may be a provision that all loans under a policy issued prior to April 9, 1982, including outstanding loans, shall bear interest at a variable rate not exceeding eight percent per annum, specified from time to time by the insurer. The effective date of any change in the variable rate shall be not less than one year after the effective date of the establishment of the previous rate. If the interest rate is increased, the amount of the increase shall not exceed one percent per annum. With respect to policies providing for a variable rate under this subdivision, the insurer shall:
(I) When a loan is made and when notification of interest due is furnished, give notice of the variable rate currently effective.
(II) As to any loans outstanding 40 days before the effective date of any increase in the variable rate, give notice of any such increase at least 30 days before the effective date.
(III) As to any loans made during the 40 days before the effective date of the increase, give notice of the increase when the loan is made. The notice shall be given to the policy owner and any assignee as shown on the records of the insurer at its home office.
(iii) There may be in policies issued on or after April 9, 1982, a provision permitting an adjustable maximum interest rate established from time to time by the life insurer as permitted by law.
(B) The rate of interest charged on a policy loan made under subdivision (A)(iii) of this subdivision (7) shall not exceed the higher of the following:
(i) the Published Monthly Average for the calendar month ending two months before the date on which the rate is determined; or
(ii) the rate used to compute the cash surrender values under the policy during the applicable period plus one percent per annum.
(C) If the maximum rate of interest is determined pursuant to subdivision (A)(iii) of this subdivision (7), the policy shall contain a provision setting forth the frequency at which the rate is to be determined for that policy.
(D) The maximum rate for each policy providing an adjustable interest rate pursuant to subdivision (A)(iii) of this subdivision (7) must be determined at regular intervals at least once every 12 months, but not more frequently than once in any three month period. At the intervals specified in the policy:
(i) the rate being charged may be increased whenever such increase as determined under subdivision (B) of this subdivision (7) would increase that rate by one-half percent or more per annum;
(ii) the rate being charged must be reduced whenever such reduction as determined under subdivision (B) of this subdivision (7) would decrease that rate by one-half percent or more per annum.
(E) The life insurer, with respect to any policy providing an adjustable interest rate pursuant to subdivision (A)(iii) of this subdivision (7), shall:
(i) notify the policyholder at the time a cash loan is made of the initial rate of interest on the loan;
(ii) notify the policyholder with respect to premium loans of the initial rate of interest on the loan as soon as it is reasonably practical to do so after making the initial loan, but notice need not be given to the policyholder when a further premium loan is added, except as provided in (iii) of this subdivision (7)(E);
(iii) send to policyholders with loans reasonable advance notice of any increase in the rate; and
(iv) include in the notices required above the substance of the pertinent provisions of subdivisions (A) and (C) of this subdivision (7).
(F) No policy providing for an adjustable interest rate pursuant to subdivision (A)(iii) of this subdivision (7) shall terminate in a policy year as the sole result of a change in the interest rate during that policy year, and the life insurer shall maintain coverage during that policy year until the time at which it would otherwise have terminated if there had been no change during that policy year.
(G) The substance of the pertinent provisions of subdivisions (A) and (C) of this subdivision (7) shall be set forth in the policies to which they apply.
(H) For purposes of this section:
(i) the rate of interest on policy loans permitted under this section includes the interest rate charged on reinstatement of policy loans for the period during and after any lapse of a policy;
(ii) the term “policy loan” includes any premium loan made under a policy to pay one or more premiums that were not paid to the life insurer as they fell due;
(iii) the term “policyholder” includes the owner of the policy or the person designated to pay premiums as shown on the records of the life insurer;
(iv) the term “policy” includes certificates issued by a fraternal benefit society and annuity contracts which provide for policy loans;
(v) “Published Monthly Average” means:
(I) Moody’s Corporate Bond Yield Average—Monthly Average Corporates as published by Moody’s Investors Service, Inc. or any successor thereto; or
(II) in the event that Moody’s Corporate Bond Yield Average—Monthly Average Corporates is no longer published, a substantially similar average, established by regulation issued by the Commissioner.
(I) No other provision of law shall apply to policy loan interest rates unless made specifically applicable to such rates.
(J) None of the above provisions shall prevent an insurer from charging less than the rate of interest specified therein. The loan value of the policy shall be at least equal to the cash surrender value at the end of the then current policy year, and the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value including any interest then accrued but not due, and unpaid balance of the premium for the current policy year, and interest which may be allowable on the loan to the end of the current policy year. The policy may also provide that if interest on any indebtedness is not paid when due it shall then be added to the existing indebtedness and shall bear interest at the same rate, and that if and when the total indebtedness on the policy, including interest due or accrued, equals or exceeds the amount of the loan value thereof, then the policy shall, except as provided in subdivision (F) of this subdivision (7), terminate and become void, but not until at least 30 days’ notice has been mailed by the insurer to the last address, of record with the insurer, of the insured or other policy owner and of any assignee of record at the insurer’s home office. The policy shall reserve to the insurer the right to defer the granting of a loan, other than for the payment of any premium to the insurer, for six months after application therefor.
(K) This subdivision shall not apply to term policies, or to term insurance benefits provided by rider or supplemental policy provisions or to industrial life insurance policies.
(8) Table of installments. In case the policy provides that the proceeds may be payable in installments which are determinable at issue of the policy, there shall be a table showing the amounts of the guaranteed installments.
(9) Reinstatement. There shall be a provision that unless:
(A) the policy has been surrendered for its cash surrender value; or
(B) its cash surrender value has been exhausted; or
(C) the paid-up term insurance, if any, has expired; the policy will be reinstated at any time within three years (or two years in the case of industrial life insurance policies) from the date of premium default upon written application therefor, the production of evidence of insurability satisfactory to the insurer, the payment of all premiums in arrears, with interest at a rate not exceeding six percent per annum, and the payment or reinstatement of any other indebtedness to the insurer upon the policy, with interest compounded annually at the rate set forth in the policy for policy loan interest.
(10) Payment of claims. There shall be a provision that when the benefits under the policy shall become payable by reason of the death of the insured, settlement shall be made upon receipt of due proof of death and, at the insurer’s option, surrender of the policy and/or proof of the interest of the claimant. If an insurer shall specify a particular period prior to the expiration of which settlement shall be made, such period shall not exceed 30 days from the receipt of such proofs.
(11) Beneficiary industrial policies. An industrial life insurance policy shall have the name of the beneficiary designated thereon or in the application or other form if attached to the policy, with a reservation of the right to designate or change the beneficiary after the issuance of the policy, unless such beneficiary be irrevocably designated. The policy may also provide that no designation or change of beneficiary shall be binding on the insurer until endorsed on the policy by the insurer, and that the insurer may refuse to endorse the name of any proposed beneficiary who does not appear to the insurer to have an insurable interest in the life of the insured. The policy may also provide that if the beneficiary designated in the policy does not make a claim under the policy or does not surrender the policy with due proof of death within the period stated in the policy, which shall not be less than 30 days after the death of the insured, or if the beneficiary is the estate of the insured, or is a minor, or dies before the insured, or is not legally competent to give a valid release, then the insurer may make any payment thereunder to the executor or administrator of the insured, or to any relative of the insured by blood or legal adoption or connection by civil marriage, or to any person appearing to the insurer to be equitably entitled thereto by reason of having been named beneficiary, or by reason of having incurred expense for the maintenance, medical attention or burial of the insured. The policy may also include a similar provision applicable to any other payment due under the policy.
(12) Title. There shall be a title on the policy, briefly describing the same. (Added 1967, No. 344 (Adj. Sess.), § 1 (ch. 2, subch. 2, §§ 1-13); amended 1977, No. 45, § 1, eff. April 19, 1977; 1981, No. 144 (Adj. Sess.), eff. April 9, 1982; 2009, No. 3, § 12a, eff. Sept. 1, 2009; 2019, No. 103 (Adj. Sess.), § 18.)