Texas Life Insurance — State-Specific Rules

Every individual life insurance policy issued in Texas must contain a defined set of required provisions.

Texas required provisions (TIC Chapter 1101)

Grace period — one month, or 31 days (TIC 1101.005; TAC § 4.602)

Texas requires a grace period of at least one month for the payment of each premium after the first, and at least 31 days when the policy states the grace period in days. During the grace period the policy stays in force. If the insured dies in the grace period, the insurer pays the death benefit, and the policy may provide that the overdue premium is deducted from the proceeds. If the premium is still unpaid when grace ends, the policy lapses, subject to any nonforfeiture options.

Incontestability — 2 years (TIC 1101.006)

Texas requires every individual life policy to be incontestable after it has been in force for two years from its date of issue during the insured’s lifetime. Once the policy clears the two-year mark, the insurer cannot contest it on the ground of a misrepresentation in the application — even a material one. The only contests the policy may keep are for nonpayment of premiums and, at the insurer’s option, violation of policy conditions on naval and military service in time of war (TIC 1101.006). Inside the first two years, a misrepresentation in the application defeats recovery only if it is of a material fact and affects the risks assumed (TIC 705.051).

Reinstatement — 3-year window (TAC § 4.611)

When a Texas life policy with nonforfeiture benefits lapses for nonpayment and its value has been applied to buy other insurance, the policy must let the owner reinstate it within 3 years of the date of default, or longer if the insurer chooses, as long as the other insurance is in force and the policy has not been surrendered and canceled (TAC § 4.611(a)). To reinstate, the policyowner must:

• Pay all overdue premiums, with interest.
• Furnish evidence of insurability satisfactory to the company — usually a fresh application and possibly underwriting. The evidence need not be limited to good health.

Once the reinstatement period ends, the owner no longer has a right to reinstate, and new coverage takes a new application.

Suicide exclusion (TIC 1101.055)

Texas permits a life policy to pay less than the face amount when the insured dies by suicide, whether sane or insane (TIC 1101.055(b)), and policies commonly limit that exclusion to the first 2 years. Under a typical two-year clause, if the insured dies by suicide within two years of the policy’s effective date, the insurer’s liability is limited to a return of premiums paid; the death benefit is not payable. After the two-year period, suicide is covered like any other cause of death.

Nonforfeiture options (TIC Chapter 1105)

Permanent Texas life policies must include nonforfeiture provisions — guaranteed alternatives to a complete loss of coverage when the policyowner stops paying premium. The three classic options:

• Cash surrender value. Take the policy’s accumulated cash value as a lump sum and surrender the contract.
• Reduced paid-up insurance. Use the cash value as a single premium for a smaller, fully paid-up policy of the same kind.
• Extended term insurance. Use the cash value as a single premium for a term policy with the original face amount, lasting as long as the cash value will buy. (This is commonly the option that applies automatically when no other selection is made; the policy must state which paid-up benefit applies unless the owner elects another within 60 days after the default, TIC 1105.004.)

Prohibited provisions (TIC 1101.053–.055)

TIC 1101.053–.055 list specific provisions an individual Texas life policy may not contain:

• A clause limiting the time within which an action may be brought on the policy to less than 2 years after the cause of action accrues.
• A provision under which the policy is issued or takes effect more than 6 months before the date of the original application, if it makes the insured rate at a younger age than the insured’s age on the application date.
• A settlement at maturity for less than the face amount (plus dividend additions, less policy debt and any premium the policy allows to be deducted), except when death is by suicide, results from a hazardous occupation stated in the policy, or results from aviation activities under conditions the policy specifies.

Buyer’s Guide and Policy Summary

Under the NAIC Life Insurance Disclosure Model Regulation (#580), the insurer provides, in connection with the sale of an individual life insurance policy:

• Buyer’s Guide. A general consumer-information document explaining what life insurance is, what the major product types are, how policies are priced, and how to evaluate alternatives. Must be provided before the insurer accepts the initial premium, or, if the policy has an unconditional refund provision of at least 10 days, with or before delivery of the policy.
• Policy Summary. A policy-specific document showing the premiums, death benefits, cash values, and other key features of the specific policy being recommended. Required for a policy the insurer will not market with an illustration, and delivered on the same timing as the Buyer’s Guide.

Texas group life insurance (TIC Chapter 1131)

Group eligibility and underwriting (TIC 1131.051–.065)

Texas requires a group life policy to be issued to a group meeting one of the recognized eligible-group categories — among them employers, labor unions, trustees of funds established by employers or unions, governmental entities, creditors, and nonprofit organizations and associations (TIC 1131.051–.065). The defining feature of a group is that the underwriting is done on the group as a whole, not on individual members; eligible members typically obtain coverage with little or no individual underwriting.

Conversion to individual policy (TIC 1131.110)

When an individual’s group life coverage ends because the individual’s employment or membership in the eligible class ends, the individual is entitled to convert to an individual life policy (other than term insurance) without evidence of insurability, in an amount up to the coverage that ended, by applying and paying the first premium within 31 days (TIC 1131.110). When the group policy itself terminates, an individual insured for at least five years has the same right, though the policy may limit the amount (TIC 1131.111). Conversion preserves access to life coverage for individuals who may otherwise be uninsurable at attained age and current health.

Dependent coverage (TIC 1131.802–.804)

Texas group life policies may include dependent coverage — for the insured employee’s spouse, and for a natural or adopted child or grandchild younger than 25 (or an older age the policy states) or a disabled child under the parents’ supervision (TIC 1131.802). A spouse’s or child’s amount may not exceed the amount for which the insured employee is eligible, and amounts must follow a plan that precludes individual selection.

Assignment (TIC 1131.006)

A Texas group life certificate may be assigned by the insured, subject to the terms of the master group policy. Assignment can be useful in estate planning, charitable giving, or as collateral for a loan. The assignment may be made to any person or entity other than the insured’s employer.

Credit life insurance (TIC Chapter 1153; TAC § 3.5001–3.5206)

Credit life insurance pays off (or pays down) a debtor’s outstanding balance on a specific loan if the debtor dies during the term of the loan. Texas law imposes consumer protections:

• Choice of insurer. If a creditor requires credit life as additional security for the debt, the debtor may provide it through an existing policy or a policy from any insurer authorized in Texas (TIC 1153.161).
• Amount limits. The initial amount of credit life insurance may not exceed the total amount of the debt (TIC 1153.155).
• Term limits. The coverage must end no later than the 15th day after the scheduled maturity date of the debt, unless coverage after that date costs the debtor nothing more (TIC 1153.160).
• Refunds on early payoff. If the debt is paid off early, the debtor is entitled to a refund of unearned premium (TIC 1153.202).
• Disclosure. The debtor must receive a signed application or notice of proposed insurance stating the premium or insurance charge and the amount, term, and coverage (TIC 1153.158–.159).