The Office of General Counsel issued the following opinion on June 27, 2005, representing the position of the New York State Insurance Department.
Re: Dividends on Group Term Life Insurance.
Does an affinity group whose members purchase a group life insurance policy and pay 100% of the premium, have discretion to use the dividend proceeds as it chooses?
No. A dividend apportioned under such a policy may be applied to reduce the policyholders cost on the policy. However, if the individual insureds total contributions toward the policy exceeds the policyholders net cost, then under §§ 4216(h)(1) (McKinney 2005) and 4231(b)(7) (McKinney 2005) of the N.Y. Ins. Law, the dividend must be used for the benefit of the insured.
Since this was a general question, no additional facts were furnished.
N.Y. Ins. Law § 4216 deals with the treatment of dividends under policies issued to affinity groups and in pertinent part states:
(b) Any life insurance company authorized to do business in this state may deliver in this state policies of group life insurance only as follows:
(14) A policy issued to insure any other group approved by the superintendent upon a finding that: (A) There is a common enterprise or economic or social affinity or relationship . . . . (Emphasis added).
(h) (1) Any dividend hereafter apportioned on any participating group insurance policy, . . . heretofore or hereafter issued under paragraph twelve, thirteen or fourteen of subsection (b) of this section, may be applied to reduce the policyholder's part of the cost of such policy, except that the excess, if any, of the insured's aggregate contribution under the policy over the net cost (gross premium less dividends or rate reductions) of the insurance shall be applied at the discretion of the insurer either as a cash payment to the insured or to reduce the insured's premium, unless the insured assigns the dividend or rate reduction to the policyholder. If a dividend or rate reduction is payable upon termination of the policy the insurer shall either make payment to the insured or to the policyholder upon receipt of a certification from the policyholder that the dividend or rate reduction will be distributed by the policyholder to the insureds or applied to reduce the insured's premium.
Further, N.Y. Ins. Law § 4231 deals with the treatment of dividends in general policies and in pertinent part states:
(b)(1) Except as hereinafter provided, the dividend so apportioned in the case of any participating policy or contract . . . , 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 . . . 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 . . . .
(b)(7) In the case of any participating group policy of life insurance . . . 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 hereof. 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.
Under § 4216, dividends apportioned under a participating group life insurance policy owned by an affinity group are generally applied to reduce the policyholder's costs on the policy. However, if an individual insured's aggregate contribution toward the cost of maintaining the policy is greater than the policyholders' net cost (gross premium minus the dividends), the insurer has discretion to either apply the amount in excess as a cash payment to the individual insured, or as a reduction to the insured's premium.
Section 4231 deals with the treatment of dividends in general policies and states that any dividend apportioned must, at the option of the policyholder, either be paid in cash to the policyholder or applied toward payment of the policy premium.
In a contributory policy under both §§ 4216 & 4231, the policyholder may retain the amount up to its cost of maintaining the policy. Any amount in excess of that cost must be used for the benefit of the insured. This Department has stated that the amount appropriated for the benefit of the insured may be used to provide "recreational facilities" for the insured and does not have to be returned to, or be used to reduce the future premiums of, the insured.
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.