N.Y. Insurance Law § 4231: Policyholder's participation in surplus of life insurance companies

§ 4231. Policyholder's participation in surplus of life insurance

companies. (a) (1) Except as herein otherwise provided, every domestic

life insurance company shall ascertain and distribute annually, and not

otherwise, the proportion of any surplus accruing upon every

participating insurance policy and annuity or pure endowment contract

entitled as hereinafter provided to share therein, issued on or after

the first day of January, nineteen hundred seven.

(2) Upon the thirty-first day of December of each year, or as soon

thereafter as practicable, every such company shall ascertain the

surplus earned by it during such year.

(3) After setting aside from such surplus such sums as may be required

for the payment of authorized dividends upon the capital stock, if any,

such sums as may properly be held for account of outstanding deferred

dividend policies, if any, and such sums as may be deemed advisable for

the accumulation of a surplus not in excess of the maximum prescribed in

this chapter, every such company shall thereupon apportion the remainder

of such earnings, if any, derived from participating policies and

contracts, equitably to all policies or contracts entitled to share

therein during the full dividend year adopted by the company for such

purpose. Such apportionment shall not after the first policy year be

made contingent upon the payment of the whole or any part of the premium

for any subsequent policy year.

(4) No dividend shall be apportioned or distributed for the first

policy or contract year unless, upon reasonable assumptions as to

expenses, mortality, policy and contract claims, investment income and

lapses, it was actually earned for such year; nor shall any such company

defer the apportionment and distribution of dividends beyond the

calendar year following that in which they were earned, except that any

such company which in good faith apportions and distributes its

divisible surplus (except on policies issued on a deferred dividend

basis prior to the first day of January, nineteen hundred seven, and

continued as such thereafter) on an annual basis as dividends to all

classes of policies and contracts entitled to share therein, may

apportion and distribute all or any part of its accumulated surplus, in

excess of its required minimum surplus, as a part of its dividends

apportioned and distributed on an annual basis, or, with the approval of

the superintendent, at reasonable intervals with respect to any policy

or contract or on its termination by death, maturity or surrender, as

additional or extra dividends in an amount deemed by him not inequitable

in proportion to the annual dividends paid in preceding years on such

policies or contracts. When this apportionment and distribution at

reasonable intervals, for a class of industrial life insurance policies,

takes the form of an equitable addition to the death benefit, the

superintendent need not require any addition to the cash surrender

values of the policies, anything in this chapter to the contrary

notwithstanding.

(5) Dividends apportioned as aforesaid in the case of a policy or

contract, other than an industrial life insurance policy, issued on or

after the first day of January, nineteen hundred seven, shall, unless

otherwise provided in the policy or contract, be payable at the option

of the company, either upon the anniversary of the policy or contract

next after each thirty-first day of December, or upon the anniversary of

the policy or contract next following each thirtieth day of April; and

in every case after the first policy or contract year shall be payable

upon the sole condition that premium or stipulated payments of the

policy or contract year current upon said respective dates shall have

been completed.

(b) (1) Except as hereinafter provided, the dividend so apportioned in

the case of any participating policy or contract issued on or after the

first day of January, nineteen hundred seven, shall, at the option of

the person entitled to elect such option, be either:

(A) payable in cash except that cash payment will not be required for

a policy or contract qualified for special tax treatment under

subsection (b) of section four hundred three of the Internal Revenue

Code to the extent that such payment would prevent such qualification or

for a policy or contract with respect to which the superintendent has

determined that cash payment of dividends would be inappropriate, or

(B) applicable to the payment of any premium or premiums upon said

policy or contract, or

(C) applicable to the purchase of a paid-up addition thereto, or

(D) permitted to accumulate to the credit of the policy or contract,

at such rate of interest as shall be allowed by the company, and, with

such interest shall be payable upon the maturity of the policy or

contract, or shall be withdrawable in cash on any anniversary of the

date of issue thereof.

(2) Where subparagraph (A) of paragraph one hereof has been selected

and payment cannot be effected by the company, the funds shall be

applied under option subparagraph (C) or (D) of such paragraph, as

determined by the company.

(3) Such company shall, unless an election has previously been made,

require such person to elect the manner in which such dividends shall be

applied, as above provided, by mailing a written notice of the amount of

the said dividends and the options available as aforesaid in a sealed

envelope in the manner required by paragraph one of subsection (b) of

section three thousand two hundred eleven of this chapter.

(4) In case the person entitled to elect such option shall fail to

notify the company in writing of his election within three months after

the date of the mailing of said notice, the dividends shall, except as

otherwise herein provided, be applied by the company pursuant to the

option specified in subparagraph (C) of paragraph one hereof.

(5) In the case of any extended term or reduced paid-up insurance, the

dividends so apportioned shall be applicable as provided in the policy

with the approval of the superintendent.

(6) In the case of any individual term policy and of every individual

participating annuity, other than an annuity described in paragraph

eight of this subsection, or pure endowment contract, the dividends so

apportioned shall be applicable, at the election of the holder of such

policy or contract, in accordance with the options specified in

subparagraph (A) or (B) of paragraph one of this subsection or if the

policy or contract so provides, subparagraph (D) of paragraph one of

this subsection. In the case of any such term policy or annuity or pure

endowment contract, the requirement as to notice of election

hereinbefore specified shall be applicable, but the option which shall

be applied in case the holder of such contract fails to make such

election shall be determined by the company with the approval of the

superintendent.

(7) In the case of any participating group policy of life insurance or

any participating group or blanket policy of accident and health

insurance, or of any participating group annuity contract, other than an

annuity described in paragraph eight of this subsection, the dividend so

apportioned shall, at the option of the policyholder or holder of the

master contract, be applied pursuant to subparagraph (A) or (B) of

paragraph one of this subsection. Any dividend so apportioned on any

such participating group insurance policy, or any rate reduction made or

continued on any non-participating group insurance policy for the first

or any subsequent year of insurance under any such policy issued to an

employer, may be applied to reduce the employer's part of the cost of

such policy, except that the excess, if any, of the employees' aggregate

contribution under the policy over the net cost of the insurance shall

be applied by the employer for the sole benefit of the employees.

(8) In the case of any individual or group participating immediate

annuity and of any individual or group participating deferred annuity in

which each consideration paid into the annuity purchases guaranteed

paid-up annuity benefits determined at the time the consideration is

paid, the dividend so apportioned shall be applicable, at the election

of the holder of the individual contract or group certificate, in

accordance with the options specified in subparagraph (A), (B) or (C) of

paragraph one of this subsection or if the contract or certificate so

provides, subparagraph (D) of paragraph one of this subsection.

(c) (1) In the case of participating industrial life insurance

policies, the provisions of subsection (b) hereof specifying the options

available to the policyholder with respect to the mode of application or

payment of such dividends, and requiring notice of such options, and

specifying the option effective in the absence of election, shall not be

applicable.

(2) The dividends apportioned on such policies pursuant to this

section shall be distributed annually except as provided in subsection

(a) hereof in such manner as may be determined by the company, with the

approval of the superintendent. Such dividends shall be paid or applied

upon the first day of January of each year upon the sole condition that

the premium payments for the next preceding calendar year have been

completed, except that the company may, at its option, exclude the

premium payments within the period of grace as a condition for payment

or application of such dividends.

(3) Participating endowment policies which, by their terms, mature in

twenty or more years and which are for amounts of less than one thousand

dollars and which are subject to the provisions of section three

thousand two hundred three of this chapter, may be issued without

including the provisions of subsection (b) hereof specifying the option

available to the policyholder with respect to the mode of application or

payment of such dividend, and requiring notice of such option and

specifying the option effective in the absence of application, and if so

issued the dividend shall be paid in cash.

(d) In addition to all other grounds provided in or pursuant to this

chapter for the refusal to issue or renew a license to do business in

this state and for the revocation of an existing license to do business

in this state, no foreign or alien life insurance company shall be or

continue to be authorized to do business in this state, unless it shall

provide in every participating life insurance policy and in every

participating annuity or pure endowment contract issued or delivered by

it in this state that the proportion of the divisible surplus accruing

upon such policy or contract shall be ascertained and distributed

annually and not otherwise, except as otherwise provided in this section

for domestic life insurance companies.

(e) (1) Any domestic mutual life insurance company may issue on a

non-participating basis, subject to the other requirements of this

chapter, any policies and contracts described in paragraph two of

subsection (g) of this section and deferred annuity contracts providing

a period of deferment of annuity payments not in excess of one year. No

domestic mutual life insurance company shall issue non-participating

policies or contracts, other than those specified in the preceding

sentence, unless it has a special revocable permit from the

superintendent to do so. Any such company may apply to the

superintendent for such a permit. Such application shall be in the form

prescribed by the superintendent and contain or be accompanied by a

statement showing the manner in which any general outlays of the company

are to be apportioned to participating and non-participating business

and such other information as the superintendent may require for the

purpose of determining whether its methods of operation are fair and

equitable to its participating and non-participating policyholders. Such

company shall keep separate books and records of its participating and

non-participating business. The superintendent may prescribe the form in

which such books and records shall be kept.

(2) Within the meaning of this subsection any domestic stock life

insurance company shall be deemed to be a domestic mutual life insurance

company if and after ninety-five percent or more of its outstanding

capital stock is, pursuant to section seven thousand three hundred two

of this chapter or any former insurance law, held in trust for the

exclusive benefit of the holders of the policies and contracts of such

insurance company.

(3) Foreign or alien mutual life insurance companies authorized to do

business in this state may deliver or issue for delivery in this state

non-participating policies and contracts of the same kinds and subject

to the same requirements provided for domestic mutual life insurers in

paragraph one of this subsection.

(f) (1) No domestic stock life insurance company shall deliver or

issue for delivery in this state both participating and

non-participating policies or contracts and no foreign or alien stock

life insurance company shall deliver or issue for delivery in this state

any participating policy or contract unless it has a special permit from

the superintendent to do so.

(2) Any such company authorized to do business in this state may apply

to the superintendent for such a permit. Such application shall be in

the form prescribed by and contain information the superintendent

requires. Such application shall contain or be accompanied by:

(A) If such applicant has done any participating business prior to the

making of such application, a statement showing the profits and losses,

expense limits and expenses with reference to its participating and its

non-participating business, if any, and the manner in which any general

outlays of the company have been and are being apportioned to each of

such kinds of business, and such other information as the superintendent

may require for the purpose of determining whether its method of

operation is fair and equitable to its participating policyholders.

(B) An agreement by such company, evidenced by a resolution of its

board of directors or other appropriate body having power to bind such

corporation and its shareholders, to the effect that, so long as any

outstanding participating policies or contracts of such company are held

by persons resident in the state of New York, no profits on

participating policies and contracts in excess of the larger of ten

percent of such profits, or fifty cents per year per thousand dollars of

participating life insurance other than group term insurance in force at

the end of the year, shall inure to the benefit of the stockholders; and

that the profits on its participating policies and annuity contracts

shall be ascertained by allocating to such policies and annuity

contracts specific items of gain, expense or loss attributable to such

policies and contracts and an equitable proportion of the general gains

or outlays of the company.

(3) (A) Upon the filing of such application and accompanying

documents, the superintendent may, in his discretion, issue a revocable

permit to such company authorizing it to issue participating policies

and contracts in this state.

(B) If the superintendent finds, after notice and hearing, that any

such company has failed to comply with the agreement specified in

subparagraph (B) of paragraph two hereof, he may, in his discretion,

revoke the permit of such company to do a participating business in this

state, and he may, in addition thereto, in the case of a domestic stock

life insurance company, order such company to cease issuing any new

participating policies elsewhere in the continental United States, and

in the case of a foreign or alien company, order such company to cease

issuing any new policies in this state.

(C) Any violation of such an order shall constitute a violation of

this chapter.

(4) (A) In every annual statement made by any such company to the

superintendent after the issuance of such permit, and so long as its

agreement pursuant to subparagraph (B) of paragraph two hereof is in

force, such company shall exhibit the amount of participating

policyholders' surplus.

(B) Such participating policyholders' surplus shall be used only for

the payment or apportionment of dividends to participating policyholders

at least to the extent hereinbefore required, or for the purpose of

making up any loss on the participating policies of such company.

(C) Nothing herein contained shall be deemed to give any class of

policyholders priority with respect to the assets of any such company in

liquidation.

(5) This subsection shall not apply to any foreign or alien stock life

insurance company if and after ninety-five percent or more of its

outstanding capital stock is wholly owned by a non-profit corporation,

or by any other person or persons, who or which holds such stock in

trust for the exclusive benefit of the holders of the policies and

contracts of such insurance company; but no such insurance company shall

be authorized to do business in this state if it thereafter issues any

new non-participating policies or contracts, except as provided in

subsection (g) hereof.

(g) (1) The inclusion in any life or accident and health insurance

policy, or in any annuity or pure endowment contract, or in any funding

agreement, of any provision to the effect that the owner thereof shall

participate in the surplus of the company issuing such policy or

contract, shall be deemed to make such policy or contract a

participating one, with the following exceptions:

(A) Both participating and non-participating policies or contracts or

agreements may provide that in addition to any rate of interest

guaranteed by the issuing company to be paid on deferred payments of the

proceeds thereof, additional interest may be paid thereon at such rate

as the company may annually declare.

(B) Any policy or contract subject to section four thousand two

hundred twenty-one or section four thousand two hundred twenty-three of

this article may provide that, in addition to any minimum benefits

guaranteed in the contract, additional amounts may be credited to the

policy or contract in accordance with section four thousand two hundred

thirty-two of this article or section four thousand five hundred

eighteen of this chapter. The inclusion of any such provision in any

non-participating policy or contract shall not be deemed to make the

policy or contract participating and the crediting of such additional

amounts in accordance with the preceding provisions to any participating

policy or contract shall not be deemed to be a distribution of surplus

under subsections (a) and (b) of this section.

(C) Any policy of insurance or contract of annuity providing for

readjustment of the rate of premium, consideration, or deposit under the

provisions of paragraph two of subsection (c) of section four thousand

two hundred sixteen, or of paragraphs one and two of subsection (j) of

section four thousand two hundred thirty-five, or of subsection (d) of

section four thousand two hundred thirty-eight of this article shall

not, solely because of such rate readjustment provision, be deemed

participating.

(D) Any individual life policy issued or delivered in this state may

provide for prospective readjustment of the rate of premium, but the

readjustment may not cause the readjusted premium to exceed the maximum

guaranteed premium rate stated in the policy. The readjustment shall be

determined upon reasonable assumptions as to expenses, mortality, policy

and contract claims, taxes, investment income and lapses. The

readjustment shall be on a basis equitable to all policy and contract

holders and shall be based on written criteria approved by the board of

directors of the company or a committee thereof. The rate readjustment

provision shall not be deemed to make the policy participating.

(E) Readjustments in the rate of premium or stipulated contribution or

consideration or deposit for any insurance policy or annuity or pure

endowment contract or funding agreement, issued or delivered by a

domestic life insurer within or without this state, shall be determined

on the basis which is equitable to all policy or contract holders and

shall be based on written criteria approved by the board of directors of

the company or a committee thereof. The readjustment shall be determined

upon reasonable assumptions as to expenses, mortality, policy and

contract claims, taxes, investment income and lapses. Such a

readjustment shall not be deemed to be a distribution of surplus under

subsections (a) and (b) of this section.

(2) This section shall not require the apportionment or distribution

of dividends on any deferred annuity contract for the period following

the period of deferment of annuity payments, in accordance with the

provisions of such contract, nor on extended term insurance, or pure

endowment, which takes effect in the case of default in the payment of a

premium or payment on any policy or contract, nor on any dividend

additions nor on any contract or agreement of reinsurance, nor on any

group annuity contract providing deferred annuities for a class or

classes of participants in a pension or profit sharing plan qualified

under subsection (a) of section four hundred one of the United States

internal revenue code (or comparable law of any other jurisdiction) who

have terminated their participation under such plan, or with respect to

which class or classes further contributions have been discontinued

under the plan and notice of such discontinuance has been given to the

commissioner of internal revenue (or regulatory authority of such other

jurisdiction).