HOUSE SUBSTITUTE NO. 1 FOR HOUSE BILL NO. 473
AN ACT TO AMEND SECTIONS 2911 AND 2913 OF TITLE 18 OF THE DELAWARE CODE RELATING TO LIFE INSURANCE POLICY LOANS.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE:
Section 1. Amend Title 18, Delaware Code, by striking Section 2911 in its entirety and substituting in lieu thereof a new Section 2911 which shall read as follows:
"§2911. Policy Loan
(a) There shall be a provision that after three (3) 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 proper assignment or pledge of the policy and on the sole security thereof, at a rate of interest not exceeding 8% per annum (if payable in advance such interest shell not exceed the rate of 7.4% per annum for policies issued prior to January 1, 1983) an amount equal to or, at the option of the party entitled thereto, less than the loan value of the policy. Before approving any policy provision providing for a rate of interest in excess of 8%, the Commissioner may require assurances by the insurer that the holders of such policies will benefit from the increased earning of the insurer resulting from the use of such higher rates, through the use of higher dividends or lower premiums, or both. 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, any unpaid balance of the premium for the current policy year and interest 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 terminate and become void, but not until at least 30 days notice has been mailed by the insurer to the last address on record with the insurer of the Insured or other policy owner and of any assignee or record at the insurer's home office. The policy shall reserve to the the insurer the right to defer the granting of a loan, other than for the payment of any premium to the insurer, for 8 months after application therefor. Such provision shall also contain a table showing in figures the loan values each year during the first 20 years of the policy or during the term of the policy whichever is shorter. The policy, at the insurer's option, may provide for an automatic premium loan.
(b) (1) Policies issued on or after January 1, 1983, shall provide for policy loan interest rates as follows:
(a) A provision permitting a maximum interest rate of not more then 8% per annum; or
(b) A provision permitting an adjustable maximum interest rate established from time to time by the life insurer as permitted by law.
(2) The rate of interest charged on a policy loan made under Subsection (b) (1) (b) shall not exceed the higher of the following:
(a) The Published Monthly Average for the calendar month ending two months before the date on which the rate is determined; or
(b) The rate used to compute the cash surrender values under the policy during the applicable period plus 1% per annum.
(3) The term "Published Monthly Average" means:
(a) Moody's Corporate Bond Yield Average — Monthly Average Corporates as published by Moody's Investors Service, Inc. or any successor thereto; or
(b) In the event that the Moody's Corporate Bond Yield Average — Monthly Average Corporates is no longer published, a substantially similar average, established by regulation issued by the Commissioner.
(4) If the maximum rate of interest is determined pursuant to Subsection (b) (1) (b), the policy shall contain a provision setting forth the frequency at which the rate is to be determined for that policy.
(5) The maximum rate for each policy 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:
(a) The rate being charged may be increased whenever such increased as determined under Subsection (b) (2) would increase that rate by 1/2% or more per annum.
(b) The rate being charged must be reduced whenever such reduction as determined under Subsection (b) (2) would decrease that rate by 1/2% or more per annum.
(6) The life insurer shall:
(a) notify the policyholder at the time a cash loan is made of the initial rate of interest on the loan;
(b) 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. Notice need not be given to the policyholder when a further premium loan is added, except as provided in (6) (c) below:
(c) send to policyholders with loans reasonable advance notice of any increase in the rate; and
(d) include in the notices required above the substance of the pertinent provisions of Subsection (b) (1) and (b) (4.
(7) The loan value of the policy shall be determined in accordance with Subsection (a), but no policy 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.
(8) The substance of the pertinent provisions of Subsections (b) (1) and (b) (4) shall be set forth in the policies to which they apply.
(9) For purposes of this Section:
(a) The rate of interest on policy loans permitted under this Subsection includes the interest rate charged on reinstatement of policy loans for the period during and after any lapse of a policy.
(b) 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.
(c) 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.
(d) The term 'policy' includes certificates issued by a fraternal benefit society and annuity contracts which provide for policy loans.
(10) No other provision of law shall apply to policy loan interest rates unless made specifically applicable to such rates.
(11) The provisions of this Subsection shall not apply to any insurance contract issued before January 1, 1983, unless the policyholder agrees in writing to the applicability of such provisions.
(c) This section shall not apply to term policies or to term insurance benefits provided by rider or supplemental policy provisions or to industrial life insurance policies."
Section 2. Amend Title 18, Delaware Code, by deleting §2913 in its entirety and substituting in lieu thereof a new Section 2913 which shall read as follows:
There shall be a provision that unless:
(1) The policy has been surrendered for its cash surrender value; or
(2) Its cash surrender value has been exhausted; or
(3) The paid-up term insurance, if any, has expired; the policy will be reinstated at any time within 3 years (or 2 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 6% per annum compounded annually, and the payment or reinstatement of any indebtedness to the insurer upon the policy with interest as provided in Section 2911 of Title 18 of this Code.
Section 3. The provisions of this Act shall take effect on January 1, 1982.
Approved July 21, 1983.