(a) There shall be a provision that after three 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 of the policy, at a specified rate of interest not exceeding eight percent a year, an amount equal to or, at the option of the party entitled to it, less than the loan value of the policy. The director may authorize rates of interest in excess of six percent only on a finding that the holders of policies will benefit from the increased earnings of the insurer resulting from the higher rates, through the use of higher dividends or lower premiums, or both. 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, except that the insurer may deduct, either from the loan value or from the proceeds of the loan, an existing indebtedness not already deducted in determining the cash surrender value including interest then accrued but not due, the unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year. The policy may also provide that if interest on an 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 of the policy, the policy shall terminate and become void. The policy must reserve to the insurer the right to defer the granting of a loan, other than for the payment of a premium to the insurer, for six months after the date of the loan application. The policy, at the insurer’s option, may provide for automatic premium loan, subject to an election of the party entitled to elect. Except as provided in (e) of this section, the required interest rates on policy loans set out in this section apply only to policies issued before July 1, 1982.
(b) This section does not apply to term policies or to term insurance benefits provided by rider or supplemental policy provisions, or to industrial life insurance policies.
(c) A policy issued on or after July 1, 1982, must have a provision specifying an interest rate on a policy loan not to exceed eight percent a year, or a provision permitting an adjustable maximum interest rate established under this subsection. An adjustable maximum rate of interest on a policy loan determined under this subsection may not exceed the higher of the published monthly average for the calendar month ending two months before the date on which the rate is determined, or the rate used to compute cash surrender values under the policy during the applicable period plus one-twelfth of a percentage point multiplied by the number of months in the applicable period. If an adjustable maximum rate of interest is used in a policy under this subsection, the policy must contain a provision that states times for the adjustment of the interest rate for that policy. Adjustment shall occur at least once every 12 months, but not more often than once every three months. The interest rate being charged may be increased if the published monthly average increases by one-half percent or more and the interest rate being charged must be reduced if the published monthly average decreases by one-half percent or more. A life insurer shall (1) notify the policyholder of the initial rate of interest on the loan at the time a cash loan is made; (2) notify a policyholder who obtains a premium loan of the initial rate of interest on the loan as soon as it is reasonably possible to do so after making an initial premium loan; except as provided in (3) of this subsection, notice does not have to be given to the policyholder when a second or subsequent premium loan is added; (3) send reasonable advance notice of any increase in the rate to a policyholder who has a policy loan; and (4) include other relevant information on adjustment of interest rates in a notice required under this subsection. The loan value of the policy shall be determined in accordance with (a) of this section. A policy may not be terminated in a policy year as the sole result of a change in the interest rate during that policy year. If an interest rate changes, the insurer shall maintain coverage during the policy year until the date on which the policy would have terminated if the interest rate had not changed.
(d) In (c) of this section
(1) “interest rate” includes a rate of interest charged for reinstatement of policy loans for the period during and after the lapse of a policy;
(2) “policy” includes certificates issued by a fraternal benefit society and annuity contracts that provide for policy loans;
(3) “policy loan” includes a premium loan made under a policy to pay a premium that was not paid to the life insurer as it became due;
(4) “policyholder” includes an owner of a policy or a person designated to pay policy premiums according to the records of the life insurer;
(5) “published monthly average” means the monthly average of corporate bond yields as published by Moody’s Investor Service, Inc., or its successor, or if Moody’s corporate bond yield average-monthly average corporates is not published, a substantially similar average, established by regulation adopted by the director.
(e) The provisions of (c) of this section on interest rates apply only to policy loans made on policies issued on or after July 1, 1982, except that if a policyholder agrees in writing to the applicability of (c) of this section to a policy issued before July 1, 1982, that subsection applies to policy loans made on that policy.