41-1909. POLICY LOAN. (1) 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, an amount equal to or, at the option of the party entitled thereto, less than the loan value of the policy. A policy issued after July 1, 1975, and prior to July 1, 1982, shall contain either, but not both of the following policy loan interest rate provisions:
(a) A provision that a policy loan shall bear interest at a specified rate (not exceeding eight per cent (8%) per annum); or
(b) A provision that all loans under the policy, including outstanding loans, shall bear interest at a variable rate (not exceeding eight per cent (8%) per annum), specified from time to time by the insurer.
The effective date of any increase in such variable rate shall be not less than one (1) year after the effective date of the establishment of the previous rate. If the interest rate is increased, the amount of such increase shall not exceed one per cent (1%) per annum. The variable rate may be decreased without restriction as to amount or frequency. With respect to policies providing for a variable rate, the insurer shall,
1. when a loan is made and when notification of interest due is furnished, give notice of the variable rate currently effective;
2. as to any loans outstanding forty (40) days before the effective date of any increase in the variable rate, give notice of any such increase at least thirty (30) days before such effective date; and
3. as to any loans made during the forty (40) days before the effective date of the increase, give notice of such increase when the loan is made. Every such notice shall be given as directed by the policy owner and any assignee as shown on the records of the insurer at its home office.
(2) (a) Policies issued on or after July 1, 1982 shall provide for policy loan interest rates as follows:
1. A provision permitting a maximum interest rate of not more than eight per cent (8%) per annum; or
2. 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 subsection (2)(a)2. shall not exceed the higher of the following:
1. The published monthly average for the calendar month ending two (2) months before the date on which the rate is determined; or
2. The rate used to compute the cash surrender values under the policy during the applicable period plus one per cent (1%) per annum.
(c) For purposes of this section the "published monthly average" means:
1. Moody’s Corporate Bond Yield Average — Monthly Average Corporates as published by Moody’s Investors Service, Inc. or any successor thereto; or
2. 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 director.
(d) If the maximum rate of interest is determined pursuant to subsection (2)(a)2., the policy shall contain a provision setting forth the frequency at which the rate is to be determined for that policy.
(e) The maximum rate for each policy must be determined at regular intervals at least once every twelve (12) months, but not more frequently than once in any three (3) month period. At the intervals specified in the policy:
1. The rate being charged may be increased whenever such increase as determined under subsection (2)(b) would increase that rate by one-half per cent (.5%) or more per annum; or
2. The rate being charged must be reduced whenever such reduction as determined under subsection (2)(b) would decrease that rate by one-half per cent (.5%) or more per annum.
(f) The life insurer shall:
1. Notify the policyholder at the time a cash loan is made of the initial rate of interest on the loan;
2. 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 (f)3. hereof;
3. Sent [Send] to policyholders with loans reasonable advance notice of any increase in the rate; and
4. Include in the notices required above the substance of the pertinent provisions of subsections (2)(a) and (2)(d).
(g) 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.
(h) The substance of the pertinent provisions of subsections (2)(a) and (2)(d) shall be set forth in the policies to which they apply.
(i) For purposes of this section:
1. 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.
2. 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.
3. 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.
4. The term "policy" includes certificates issued by a fraternal benefit society and annuity contracts which provide for policy loans.
(j) No other provision of law shall apply to policy loan interest rates unless made specifically applicable to such rates.
(k) The provisions of this section shall not apply to any insurance contract issued before July 1, 1981 unless the policyholder agrees in writing to the applicability of such provisions.
(3) 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, provided that 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 any 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 terminate and become void. 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 (6) months after application therefor. The policy, at the insurer’s option, may provide for automatic premium loan, subject to an election of the party entitled to elect.
(4) This section shall not apply to term policies nor to term insurance benefits provided by rider or supplemental policy provisions, or to industrial life insurance policies.
History:
[41-1909, added 1961, ch. 330, sec. 440, p. 645; am. 1975, ch. 232, sec. 1, p. 635; am. 1982, ch. 359, sec. 1, p. 908.]