WHAT ARE VARIABLE CONTRACTS?

After reading “What are Variable Contracts?”, read also “What are Quasi-Contracts?”

• Variable contracts refer to any policy or contract issued by an insurance company providing for benefits under such contract that reflects investment results.
  

• Variable contracts can either be investment-linked or equity-linked.
  

• The Insurance Commissioner shall have the sole and exclusive authority to regulate the issuance and sale of variable life insurance.
  

Variable contracts refer to any policy or contract on either a group or on an individual basis issued by an insurance company providing for benefits of other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investments.

 

Variable Contracts can either be investment-linked or equity-linked. (A Short History of Variable Contracts, Dennis Funa, Insurance Forum, 2019. Accessed at https://businessmirror.com.ph/2019/09/04/a-short-history-of-variable-contracts/)

 

The law says:

Section 10 (b) of Title 10 [Variable Contracts] of Republic Act No. 10607 or the Amended Insurance Code defines a variable contract in the following manner:

“Section 10 (b) The term variable contract shall mean any policy or contract on either a group or on an individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investments or of a designated separate account in which amounts received in connection with such contracts shall have been placed and accounted for separately and apart from other investments and accounts. This contract may also provide benefits or values incidental thereto payable in fixed or variable amounts, or both. It shall not be deemed to be a security or securities as defined in The Securities Act, as amended, or in the Investment Company Act, as amended, nor subject to regulations under said Acts.

 

Section 242 of Title 10 of Republic Act No. 10607 further states that:

“Section 242. Variable contracts may be issued on the industrial life basis, provided that the pertinent provisions of this Code and of the rules and regulations of the Commissioner governing variable contracts are complied with in connection with such contracts.

 

Section 4 (A) of the Revised Guidelines on Variable Life Insurance Contracts states that every variable life insurance contract is subject to the approval of the Insurance Commission. To wit:

“Section 4. Insurance Policy Requirements

1. Approval of Variable Life Insurance Contract Form

Every variable life insurance contract form delivered or issued for delivery in the Philippines, every certificate form evidencing variable benefits issued pursuant to any such contract on a group basis, and the application, rider and endorsement forms applicable thereto and used in connection therewith, shall be subject to the prior approval of the Commission. No such form shall be approved unless it conforms to the requirements of these Guidelines”

 

What should a variable contract of insurance contain?

Section 4 (A) of the Revised Guidelines on Variable Life Insurance Contracts specifies the mandatory provisions that every variable life insurance policy shall contain, which are as follows:

“Section 4. Insurance Policy Requirements

C. Mandatory Policy Provisions

 

Every variable life insurance contract filed for approval in the Philippines shall contain at least the following:

1. The policyholder shall have a cooling-off period whereby the variable life insurance contract may be returned within fifteen (15) days of receipt of the policy by the policyholder and receive a refund equal to the market value of the units including initial charges thereof.
2. A provision of grace period of not less than thirty-one (31) days from the premium due date for any subsequent premium after the first. Any unpaid premium may be deductible from the benefits that may arise during the 31- day grace period.
3. A provision that the policy shall be incontestable after it shall have been in force during the lifetime of the insured for a period of two (2) years from its date of issue as shown in the policy, or date of approval of last reinstatement, except for non-payment of premium and except for violation of the conditions of the policy relating to military or naval service in time of war.
4. A provision specifying what documents constitute the entire insurance contract.
5. A designation of the officers, who are empowered to make an agreement or representation on behalf of the insurer and an indication that statements by the insured, or on his or her behalf, shall be considered as representations and not warranties.
6. An identification of the owner of the insurance contract.
7. A description of any adjustments in policy values to be made in the event of misstatement of age or sex of the insured. That if the age or sex of the insured has been misstated, the amount of insurance will be adjusted to the amount which the premium would have purchased at the correct age or sex, applicable risk class, applicable service charges and applicable premium rates as of the policy date. If at the correct age or sex, the insured is not eligible for any coverage under the policy or its incidental benefits, the insurer will refund the corresponding premiums actually received by the insurer less any indebtedness under the policy.
8. A provision that in the event the policyholder fails to pay a premium on time or discontinues paying premiums, notwithstanding the provision on grace period and notwithstanding periods for nil allocation of premiums, and there are withdrawal values in the policyholder’s account, the policy either continues at the same sum assured for the same basic benefits or at a reduced sum assured for death and incidental benefits. If the policyholder fails to pay a premium on time and there are no withdrawal values in the policyholder’s account, the policy terminates immediately on the day the premium is due.
9. A provision that in the event the policyholder wishes to continue to pay a premium at any time within three (3) years from the date of premium default, he may do so upon the written application and submission of evidence of insurability, including good health, satisfactory to the insurer unless the withdrawal value has been paid or the period of extended insurance has expired, and upon payment of all amounts necessary to revive the policy.
10. A provision stating that the investment policy of the separate account(s) shall not be changed without the approval of the Commission and that the approval process is on file with the Commission.
11. A description of the basis for computing the withdrawal value under the policy shall be included.
12. A provision allowing the policyholder to make partial withdrawals;
13. A statement that while the policy is in force, the Insured may, subject to the approval of the insurer, transfer or “switch” any of his or her units in a particular separate variable account to another separate variable account or some other separate variable accounts which may have been established by the insurer; such “switch” will be effected by the cancellation of the units to be “switched” and the creation of new units in the separate variable account being “switched” to; unit price will be calculated accordingly.
14. A statement of any conditions or requirements concerning the assignment of the policy where the policy can be used as a security or collateral for any financial dealings. The party to whom the policy is assigned as a security or collateral must notify the insurer in writing of its interest. The insurer shall not be responsible for the verification of the authenticity or validity of any such assignment.
15. A provision setting forth conditions or requirements as to the designation, or change of designation, of a beneficiary and a provision for disbursement of benefits in the absence of a beneficiary designation.
16. Premiums or charges for incidental insurance benefits shall be stated separately.
17. An exclusion for suicide within two (2) years of the issue date of the policy or its last reinstatement, if any, the pertinent provisions of the Insurance Code shall apply. Provided, however, that to the extent of the increased death benefits only, the policy may provide an exclusion for suicide within two (2) years of any increase in death benefits which results from an application of the owner subsequent to the policy issue date.

A provision for benefits payable in case of death by suicide is not compensable shall be included. The benefits payable should not be less than the market value of the units plus initial charges thereof.

 

Such other provisions as are currently required for traditional life insurance policies and are not inconsistent with these Guidelines shall apply.

 

Who has the power to regulate the issuance and sale of variable contracts?

Under the Insurance Code, it is the Insurance Commissioner who is vested with the power to regulate the issuance and sale of variable contracts. Section 437 of Title 1 [Administrative and Adjudicatory Powers] of R.A. No. 10607 states that:

“Section 437. xxx

“The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance companies and other insurance matters, mutual benefit associations, and trusts for charitable uses are faithfully executed and to perform the duties imposed upon him by this Code, and shall, notwithstanding any existing laws to the contrary, have sole and exclusive authority to regulate the issuance and sale of variable contracts as defined in Section 238 hereof and to provide for the licensing of persons selling such contracts, and to issue such reasonable rules and regulations governing the same.

xxx” (Emphasis supplied.)

 

Moreover, Section 240 of Title 10 of the Insurance Code states that:

“Section 240. Every variable contract form delivered or issued for delivery in the Philippines, and every certified form evidencing variable benefits issued pursuant to any such contract on a group basis, and the application, rider and endorsement forms applicable thereto and used in connection therewith, shall be subject to the prior approval of the Commissioner.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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