1. (a) Purpose. Existing prepaid funeral contracts that utilize trust funded prepaid funeral benefits may be converted to insurance funded prepaid funeral benefits pursuant to the Finance Code, §154.204. Application for conversion must be made on forms acceptable to the department that meet the requirements of the Finance Code, Chapter 154, and this section.

2. (b) Definitions. The words and terms used in this section shall be defined according to Finance Code, §154.002, §25.23(a) of this title (relating to Application Fees), and §25.24(a) of this title (relating to Examination Costs and Assessment Fees), unless otherwise defined herein or unless the context clearly indicates otherwise.

   1. (1) Applicant--A permit holder under the Finance Code, Chapter 154, who files an application with the department to convert its trust funded prepaid funeral benefits under existing contracts to insurance funded prepaid funeral benefits.
   2. (2) Cash surrender value--The net amount due the policy owner from the insurer upon surrender of an insurance policy which will never be less than the cancellation benefit under the Finance Code, Chapter 154, had the contract remained trust funded.
   3. (3) Death Benefit--The total of all contract principal payments collected and earnings accumulated that are transferred at conversion, together with all future gross premiums paid and all accumulated interest earned annually on accumulated interest thereon. Interest must be compounded annually and calculated on gross premiums paid. The death benefit can never be less than the death benefit prior to conversion.
   4. (4) Insurance policy--An annuity contract relating to an insurance conversion application.
   5. (5) Load--Any commission, allowance, surrender charge or other compensation, expense load, premium expense, administrative charge or expense, policy fees, or other fee or expense paid to a Texas Department of Insurance licensed agent associated with or occurring by reason of the sale, issuance, lapse, surrender, or redemption of an insurance policy in connection with the conversion of any trust funded prepaid funeral contract to insurance funded benefits.
   6. (6) Post-conversion permit holder--The permit holder who holds and administers the prepaid funeral contracts after conversion and assumes responsibility for receiving the proceeds of the insurance policy upon maturity of a contract and processing payment to the funeral provider after verifying that the funeral service and merchandise under the prepaid funeral contract have been delivered.
   7. (7) Required reserves--The reserve liabilities for all outstanding insurance contracts valued or calculated pursuant to actuarial standards and statutory accounting standards not inconsistent with the Texas Insurance Code.
   8. (8) TDI--The Texas Department of Insurance.

3. (c) Applications.

   1. (1) When applying for permission to convert trust funded benefits under existing prepaid funeral contracts to insurance funded benefits, an applicant must, at a minimum:

      1. (A) hold a valid permit issued by the department under the Finance Code, Chapter 154;
      2. (B) be in good standing with the department;
      3. (C) submit a completed conversion application to the department; and
      4. (D) as of its most recent examination by the department, not have been found to be in violation of any applicable laws or regulations relating to the Finance Code, Chapter 154, or the Texas Insurance Code or to have any other deficiencies of any significance that have not been remedied or corrected to the satisfaction of the department.
   2. (2) The department may, if it considers it necessary to safeguard the interests of the prepaid funeral contract purchasers, conduct an examination of the applicant within 45 days of the date the application is accepted by the department for filing.

   3. (3) Each application for conversion must include:

      1. (A) a copy of a letter to the applicant from an insurance company authorized to do business in Texas setting out the insurance company's agreement to issue insurance policies to convert the prepaid funeral contracts from trust funded benefits to insurance funded benefits;

      2. (B) a copy of the written commitment to the commissioner containing the agreement between or among the insurance company, the applicant, and the post-conversion permit holder regarding the transfer, receipt, and application of the trust funds upon conversion, which commitment must:

         1. (i) include the full name of the agent or agents who will be receiving any load and their respective TDI license numbers; and
         2. (ii) require that a copy of each insurance policy issued be furnished to the owner of the insurance policy and that a copy be made available to the respective prepaid funeral contract purchasers upon request, in the event they are not the owners of the policies;

      3. (C) a pre-conversion summary of the individual prepaid funeral contracts, which must include, at a minimum, the following information (as of a date within 30 days of the date of the application), as well as aggregated totals for each category of information, if appropriate:

         1. (i) purchaser's name and, if available, date of birth;
         2. (ii) date of execution of the prepaid funeral contract;
         3. (iii) face amount;
         4. (iv) amount paid in and amount left owing;
         5. (v) accumulated earnings;
         6. (vi) amount due the prepaid funeral contract purchaser upon cancellation and the amount due the applicant upon death of the prepaid funeral contract beneficiary, assuming death or cancellation were to occur on or about the date of the application; and
         7. (vii) amount retained by the applicant under the Finance Code, §154.252;

      4. (D) a post-conversion summary of the individual prepaid funeral contracts, which must include, at a minimum, the following information (as of the same date as the pre-conversion summary), as well as aggregated totals for each category of information, if appropriate:

         1. (i) annuitant's name;
         2. (ii) original prepaid funeral contract amount;
         3. (iii) amount paid in;
         4. (iv) amount applied to the purchase of the insurance policy;
         5. (v) initial cash surrender value and initial death benefit under the insurance policy; and
         6. (vi) amount retained by the applicant under the Finance Code, §154.252;
      5. (E) a copy of the insurance policy approved by TDI showing the approval stamp of TDI, or evidence that the policy is deemed to have been approved or exempt from approval;
      6. (F) a copy of the proposed negative response notification letter to the prepaid funeral contract purchasers from the applicant containing a statement explaining the purchaser has 60 days to file a written request with the department to have the contract converted back to trust funded benefits;
      7. (G) unless otherwise waived by the commissioner upon a showing of good cause, current year-to-date financial statements for the post-conversion permit holder and insurance company (dated no more than six months prior to the date of the application) and an actuarial certification certifying that the reserves to be held by the insurance company with respect to the conversion will be adequate to pay claims as they become due;
      8. (H) a copy of the insurance company's most recent actuarial certification, dated no more than one year prior to the date of application;
      9. (I) a copy of the proposed notification letter from the insurance company to the prepaid funeral contract purchasers regarding the conversion;
      10. (J) a statement defining the insurance policy load, including the percentage or dollar amount of the load, the time at which it is to be imposed, and how the load will be distributed;
      11. (K) a copy of the form of assignment, if any, to be used in assigning insurance policy rights or proceeds to the post-conversion permit holder; and
      12. (L) the conversion application fee prescribed in §25.23 of this title (relating to Application Fees).

4. (d) Standards for approval of application.

   1. (1) An application for conversion will be approved by the commissioner if, in the commissioner's opinion, the rights and interests of the prepaid funeral contract purchasers under the insurance funded benefits arrangement will be safeguarded to at least the same degree as provided under the trust funded benefits arrangement. An application may be approved without the necessity of a hearing.

   2. (2) In order for insurance funded benefits under an application for conversion to be considered to safeguard the rights and interests of the prepaid funeral contract purchasers to at least the same degree as the trust funded benefits, the insurance benefits must comply with this subsection.

      1. (A) Unless otherwise permitted by the commissioner upon a showing of good cause, the insurance funded benefits arrangement must apply to all of the applicant's trust funded prepaid funeral contract purchasers, as of the date of the application.
      2. (B) The transfer of the trust funds to the insurance company must include the full sum required to be deposited as trust principal by the applicant pursuant to the Finance Code, Chapter 154, under the trust funded prepaid funeral contracts proposed for conversion, plus all net earnings accumulated with respect thereto, as of the transfer date. No load may be deducted from the trust funds transferred pursuant to the conversion application.
      3. (C) No provision in the insurance policy may allow for contesting coverage, limit death benefits in the case of suicide, refer to a physical examination, or otherwise operate as an exclusion, limitation, or condition, other than requiring submission of proof of death or surrender of the policy at the time the prepaid funeral contract is funded, matures, or cancels, as the case may be.
      4. (D) The death benefit under the insurance policy may be paid to a funeral provider that honors the prepaid funeral contract conversion other than the applicant if the conversion agreement between the applicant and the post-conversion permit holder permits such substitution. The purchaser, however, may require performance by the applicant, in which case this provision is inapplicable.
      5. (E) The insurance company must demonstrate that, in the previous seven years, the average death benefit growth under the same or substantially similar insurance policies issued by the insurance company to fund prepaid funeral contracts has been at least 3.0% accumulated per annum based on gross premiums paid. If the insurance company cannot so demonstrate, then the insurance policy must provide for guaranteed growth of the death benefit of no less than 2.0% per annum compounded annually on gross premiums paid beginning in the first year of the policy.
      6. (F) The post-conversion permit holder is responsible for payment of all death and cancellation claims in accordance with the provisions of the Finance Code, Chapter 154.
      7. (G) The post-conversion permit holder must have a current valid permit issued by the department under the Finance Code, Chapter 154, and must be in good standing with the department.
      8. (H) The post-conversion permit holder must have been examined by the department within the 24-month period immediately preceding the date of the application and not have been found to be in violation of any applicable laws or regulations relating to the Finance Code, Chapter 154, or the Texas Insurance Code or to have any other deficiencies of any significance which have not been remedied or corrected to the satisfaction of the department. If the post-conversion permit holder has not been examined by the department within such time period, the department may, if it considers it necessary, conduct an examination of the post-conversion permit holder within 45 days of the date the application is accepted for filing.
      9. (I) The insurance company must be a member of the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association.
      10. (J) Any insurance policy issued on any individual must be for an amount not less than the amount of principal and interest transferred for that individual to the insurance company, and any supplemental insurance policy issued to cover the unfunded portion of the contract must have a face amount that is at least as great as the unfunded principal balance. No credit or reduction may be made for interest earned or accrued on the paid-in principal balance.
      11. (K) The insurance policy must provide each prepaid funeral contract purchaser with a cash surrender value or cancellation benefit that is at least the same as the cancellation benefit provided for under the trust funded benefits arrangement for the duration of the prepaid funeral contract. If a prepaid funeral contract is canceled at the initiative of the purchaser after the 60-day initial conversion cancellation period, the permit-holder must remit at least the applicable cancellation benefit directly to the purchaser in accordance with the provisions of the prepaid funeral contract. In addition, the insurance company is responsible for maintaining adequate reserves for cancellations.
   3. (3) The applicant must demonstrate compliance with the Finance Code, §154.304, for the previous year, and may not convert prepaid funeral contracts that are presumed abandoned under the Finance Code, §154.301. Any prepaid funeral contracts presumed to have been abandoned and the funds attributable to such contracts must be reported and delivered to the Texas State Treasurer in accordance with Texas Property Code, Chapter 74.

5. (e) Post-conversion summary. The post-conversion permit holder must submit to the department, within 90 days of the date of transfer of the trust funds as authorized by the commissioner's order, a post-conversion summary of the individual prepaid funeral contracts as of the conversion date, which must include, at a minimum, the following information, as well as aggregated totals for each category of information, if appropriate:

   1. (1) insured's name;
   2. (2) insured's policy number;
   3. (3) the original prepaid funeral contract amount;
   4. (4) amount paid in;
   5. (5) unpaid balance of the prepaid funeral contract;
   6. (6) amount retained by the applicant under the Finance Code, §154.252;
   7. (7) amount applied to the purchase of the insurance policy; and
   8. (8) initial cash surrender value and initial death benefit under the insurance policy.
6. (f) Records. The applicant shall relinquish to the post-conversion permit holder the individual prepaid funeral contract ledgers reflecting the amount paid and the amount left owing on the prepaid funeral contract, if any. The post-conversion permit holder shall be responsible for maintaining such ledgers to reflect the principal balance of the converted contracts as well as any outstanding balances.
7. (g) Time requirements. Within 90 days of the execution of the conversion order, the post-conversion permit holder must submit a notarized statement to the department attesting that the insurance policies have been issued and funded on behalf of the contract purchasers listed in the original post-conversion summary included in the conversion application and that all notices required under subsection (c)(3)(I) of this section have been given. Within 120 days of the execution of the conversion order, all requirements under this section for completion of a conversion must be met; if they are not, the conversion order is void without further action of the department.
8. (h) Hearings. The commissioner may order a hearing on an application. A hearing, if ordered, shall be conducted pursuant to the department's rules governing hearings. The applicant shall have the burden to demonstrate the existence of all factors necessary to entitle the applicant to convert to insurance funded benefits from trust funded benefits by a preponderance of the evidence.

Source Note:The provisions of this §25.25 adopted to be effective March 20, 1996, 21 TexReg 1861; amended to be effective December 27, 1996, 21 TexReg 12099.